FIN 4604 Sample Questions I

FIN 4604 SAMPLE PROBLEMS IPART A

1. Suppose that the Brazilian real depreciates by 40% against the U.S. dollar. By how much will the dollar appreciate against the real?a. 67%b. 40%c. 32%d. 28%e. 75%

2. If the dollar appreciates by 300% against the Turkish Lira, obtain the Lira’s depreciation against the dollar.a. -67%b. –40%c. –32%d. -28%e. –75%

3. The asset market view of exchange rate determination says that the spot rate:a. Should follow a random walk.b. Is affected primarily by a nation’s long-run economic prospects.c. Both a and b.d. Should be strongly affected by a nation’s balance of trade.

e. Should be strongly affected by current relative income, relative prices, and relative interest rates.

4. The current international flow model of exchange rate determination says that the spot rate should:

a. Follow a random walk.b. Be affected primarily by a nation’s long-run economic prospects.c. Be strongly affected by a nation’s balance of trade.d. Be strongly affected by current relative incomes, relative prices, and relative

interest rates.e. Both c and d.

5. Governments intervene in the foreign exchange markets for all of the following reasons except to:

a. Earn foreign exchange.b. Reduce economic uncertainty.c. Improve the nation’s export competitiveness.d. Reduce inflation.e. Boost or lower the value of domestic currency.

6. In order to boost the value of the euro relative to the d ollar the FED should:

a. Sell dollars for euros and the European CB should buy euros with Dollars. b. Sell dollars for euros and the European CB should buy dollars with euros.c. Sell euros for dollars and the European CB should sell dollars for euros.d. Sell euros for dollars and the European CB should buy euros with dollars.e. Sell euros for dollars and the European CB should buy dollars with euros.

1

7. In order to boost the value of the dollar relative to the euro the FED should:a. Sell dollars for euros and the European CB should buy euros with Dollars.b. Sell dollars for euros and the European CB should buy dollars with euros.c. Sell euros for dollars and the European CB should sell dollars for euros.d. Sell euros for dollars and the European CB should buy euros with dollars.e. Sell euros for dollars and the European CB should buy dollars with euros.

8. Given that the DM price of the ECU was 2.0583 and the DG price of the ECU was 2.3194. Then the DG price of the DM by cross rates is given by:

a. DM = about 4.73 DG.b. DM = about .26 DG.c. DM = about 1.13 DG.d. DM = about .89 DG.

9. The spot and 30-day forward rates for the Swiss franc are $.3075 and $.3120, respectively. The franc is said to be selling at a forward:

a. Premium of 16.83%.b. Premium of 17.56%.c. Discount of 6.39%.d. Discount of 15.10%.

10. Given that C$/U$ = 1.5938 and Y/U$ = 133.30, then the yen price of one Canadian dollar is given by:

a. 83.64b. 0.011956c. 212.45d. 0.4707e. None of the above

11. A commercial bank quotes a bid rate of $.784 for the Swiss France, and an ask rate of $.80. What is the bid/ask percentage spread that reflects the “markup established” [compare with b/a based on “discount obtained”] by the dealer.

a. 0.2%b. 2%c. 2.04%d. 0.016%e. None of the above

12. Which of the following theories points to international business engagement as a natural stage in the evolution of new products from introduction to growth, maturity, and possible decline?

a. Theory of comparative advantage.b. Imperfect markets theory.c. Product cycle theory.d. Internalization theorye. None of the above.

2

13. Which of the following theories identifies the propensity of firms to seek protection of their proprietary technologies and their desire to engage in global exploitation of such technologies as a motivation for international business? a. Theory of comparative advantage.

b. Imperfect markets theory.c. Product cycle theory.d. Internalization theorye. None of the above.

14. Which of the following theories identifies the non-transferability of resources

as an explanation for international business?a. Theory of comparative advantage.b. Imperfect markets theory.c. Product cycle theory.d. None of the above.

15. Which of the following theories identifies risk diversification as a motivation for international business?

a. Theory of comparative advantage.b. Imperfect markets theory.c. Product cycle theory.d. Theory of absolute advantage

e. Portfolio theory

16. Which of the following theories identifies specialization as a motivation for international business?

a. Theory of comparative advantage.b. Imperfect markets theory.c. Product cycle theory.d. Theory of absolute advantage

e. Both (a) and (d).

17. Which of the following forecasting techniques would best represent use of today’s forward exchange rate to forecast the future exchange rate?

a. Fundamental forecastingb. Market-based forecastingc. Technical forecastingd. Mixed forecasting

e. None of the above.

18. Under a fixed exchange rate system:a. A foreign exchange market does not exist.b. Central bank intervention in the foreign exchange market is not necessary.c. Central bank intervention in the foreign exchange market is very necessary.d. Central bank intervention in the foreign exchange market is not allowed.e. Central bank intervention in the foreign exchange market is not effective

3

19. A Eurocurrency is:a. Any currency traded in Europeb.Regulated by the central bank of the country where it is locatedc.Any currency deposited outside its country of origind.Stronger than it is in its home countrye.The new common currency of the EU

20. A relative high domestic inflation, other things being equal, would tend to cause the home currency to:

a.Appreciate.b. Depreciation.c.Remain constant.d. Fluctuate within narrow bands.

21. A relative low home inflation, other things being equal, would tend to cause the home currency to:

a.Appreciate.b. Depreciate.c.Remain constant.d. Fluctuate within narrow bands.

22. When the Fed intervenes in the foreign exchange markets while taking action to maintain the dollar money supply, it is said to use:

a.Non-sterilized intervention.b.Sterilized intervention.c.Active intervention.d.Reactive intervention.

23. When the Fed intervenes in the foreign exchange markets without taking action to maintain the dollar money supply, it is said to use:a. Non-sterilized intervention.b. Sterilized intervention.c. Active intervention.d. Reactive intervention.e. Open market intervention

24. The following statement is true concerning a strong domestic currency except: a. Encourages more imports.b. Discourages more exports.c. Increases domestic competition.d. May induce lower unemployment.

25. Which of the following statement is true concerning a weak domestic currency?

a. Encourages more imports.b. Discourages more exports.c. Increases domestic competition.d. May induce lower unemployment.

4

26. A weak home currency may result in the following except : a. Increased exports.

b. Decreased imports. c. Lower domestic inflation.

d. Reduced unemployment.

27. Which of the following is (are) consistent with a strong domestic currency a. Increased exports.

b. Decreased imports. c. Lower domestic inflation.

d. Reduced unemployment

28. The following statement is not true concerning technical forecasting of exchange rates:a. It is based on bar charts, computer extrapolations or mathematical models.b. The analyst must discover price patterns that are forecastable.c. The exchange rate must follow a random walkd. Duration and extent of price patterns must be ascertained to permit investors to

recognize and profit form them.e. The underlying assumption is that the past provides a good indication of the future.

29. The statement, the forward rate is an unbiased predictor of the future spot rate, means: a. The forward rate is always equal to the future spot at maturity.b. The forward is never equal to the future spot at maturity.c. The exchange rate is random.d. The forward rate is equally likely to overstate or understate the future spot.e. The forward premium (discount) is an unbiased predictor of the expected change in

exchange rates.f. Both (d) and (e)

30. The law of one price is enforced primarily by:a. Arbitragers.b. Speculators.c. Hedgers.d. Dealerse. Central Banksf. Bank for International Settlements

31. A German investment in the U.S. represents a foreign factor of production located in the U.S. and the income from such investment adds to:

a. GNP of the U.S.b. GDP of Germany.c. GNP of Germany.d. Trade balance of the U.S.e. Both (a) and (b).

32. A U.S. investment in Germany represents a foreign factor of production located in Germany and the income from such investment adds to:

a. GNP of the U.S.b. GDP of Germany.c. GNP of Germany.d. The GDP of U.S.e. Both (a) and (b).

5

33. If the Central Bank sets a fixed exchange rate that overvalues domestic currency, then:

a. The Central Bank will gain reserves. b. There will be an excess demand for domestic currency.c. The country will run a BOP deficit.d. The country will run a BOP surplus.e. Both (a) and (d).

34. If the Central Bank sets a fixed exchange rate that undervalues domestic currency, then:a. The Central Bank will lose reserves.b. There will be an excess supply of domestic currency.c. The country will run a BOP deficit.d. The country will run a BOP surplus.e. Both (a) and (c)

35. Which of the following is not true concerning freely floating exchange rates?a. Ensure that a nation’s economic problems are less contagious to other countries.b. Permit a more accurate value of a currency to prevail and allow a more efficient

allocation of resources.c. Governments can implement domestic economic policies without concerns about

keeping exchange rates within limits.d. MNC do not need to measure and manage their exposure to exchange rates.e. Currency values are determined purely by market forces.

36. If the values of major currencies were fixed to the dollar and the dollar were tied to gold (Bretton Woods System) then the following would not be true:

a. There could be no inflation or deflation in the USb. There could be no inflation or deflation in other participating countries.c. The US would need a large stock of gold and dollars to maintain the system.d. The US and major countries would have a constant inflation or deflation over timee. Both (a) and (c).

37. The following statements are true concerning fixed exchange rates except:a. Cause domestic economic problems to be transmitted to other countries.b. Governments can implement domestic economic policies without concerns on

keeping exchange rates within limits.c. MNC’s do not need to measure and manage their exposure to exchange rates.d. A fixed rate can be maintained only by actively balancing the supply and demand for

the currency.e. Promote general price stability.f. Both (b) and (c)

38. The world’s largest foreign exchange trading center is: a. New York b. London c. Tokyo d. Paris e. Hong Kong

6

39. A nation’s international transactions can best be grouped into the following three main categories: a. Current account, medium-term account, and long-term account b. Current account, long-term account, and capital account

c. Current account, capital account, and official reserve account d. Trade account, capital account, and official reserve account e. Floating account, fixed account, and official reserve account

40. A bond sold in countries other than the one in whose currency it is denominated is a: a. Foreign bond

b. Eurobond c. Domestic bond d. Global bond e. None of the above

41. Which of the following best describes what an ideal international monetary system should provide? a. Liquidity, flexibility, and elasticity b. Reliability, elasticity, and sensitivity c. Liquidity, durability, and reliability d. Liquidity, adjustments, and confidence e. None of the above

42. If a Japanese purchases a US government security: a. The Supply of dollars increases

b. The federal government deficit decreases c. The demand for dollars increases d. The US money supply increases e. None of the above

43. The following is an example of a direct intervention in the foreign exchange market by the FED or a monetary authority: a. Lowering shot-time interest rates b. Increasing the discount rate

c. Buying or selling foreign currencies d. Imposing barriers on international trade e. None of the above

44. The purchase of US Treasury bonds by a Turkish investor shows up as a: a. Credit on the capital account b. Debit on the merchandise trade account c. Credit on the official reserve account d. Debit on the services account e. Credit on the current account

45. Tourism shows up on which of the following account balance? a. Merchandise Trade b. Current c. Capital d. Basic e. Official Reserve

7

46. The “J-curve effect” describes: a. The responsiveness of the invisible trade to exchange rate changes b. The initial improvement and eventual deterioration of a county’s trade balance following a currency devaluation/depreciation. c. The lagged response of the trade balance to a currency devaluation d. The initial deterioration and eventual improvement in the trade balance following a currency devaluation.

47. A bond sold outside the borrower’s country but denominated in the currency of the country of issue is a: a. Eurobond b. Yankee bond, Bulldog bond, Samurai bond, or Matador bond. c. Foreign bond d. Global bond e. b and c

48. A “global bond” issue is a: a. Large international bond offering by several borrowers polled together. b. Large international bond offering by a single borrower that is simultaneously issued in domestic and several national bond markets and denominated in domestic currency. c. Large international bond offering by a single borrower sold to a syndicate of banks. d. Composite currency (currency cocktail) bond.

49. If the U.S. ran a deficit of $150m on the current account in a year when the country was a net recipient of $250m in long-term capital, then the basic balance would be:

a. $250m b. $200m

c. $100m d. $400m e. $50m

50. A measure of the total value of production that occurs within a country’s borders without regard to whether such production is undertaken by domestic or foreign factors of production is commonly referred to as: a. Gross National Product b. Net National Product c. Transnational Product d. Gross Domestic Product e. Balance of Payment

8

51. Which of the following would likely have the least direct influence on a country’s current account?

a. Inflation.b. National income.c. Exchange rates.d. Tariffs.e. A tax on income earned on foreign stocks.

52. ______________ is (are) income received by investors on investments in foreign financial assets (securities).

a. Portfolio incomeb. Foreign direct investment incomec. Unilateral transfersd. Factor incomee. All of the above

53. Also known as the “central banks’ central bank,” the ___________ attempts to facilitate cooperation among countries with regard to international transactions and provides assistance to countries experiencing a financial crisis.

a. World Bankb. International Financial Corporation (IFC)c. World Trade Organizationd. International Development Association (IDA)e. Bank For International Settlements (BIS)

54. ___________ is not a factor that causes currency supply and demand schedules to change.

a. Relative inflation ratesb. Change in exchange rates.c. Relative interest ratesd. Relative income levelse. Expectations

55. A large increase in the income level in Mexico along with no growth in the U.S. income level, ceteris paribus, is expected to cause a/an _________ in Mexican demand for U.S. goods, and the Mexican peso should ____________

a. Increase; appreciateb. Increase; depreciatec. Decrease; depreciated. Decrease; appreciate

9

56. An increase in U.S. interest (real) rates relative to German interest rates would likely ___________ the U.S. demand for euros and ____________ the supply of euros for sale.

a. Reduce; increaseb. Increase; reducec. Reduce; reduced. Increase; increase

57. If U.S. inflation suddenly increased while European inflation stayed the same, there would be:

a. An increased U.S. demand for euros and an increased supply of euros for sale.b. A decreased U.S. demand for euros and an increased supply of euros for sale.c. A decreased U.S. demand for euros and a decreased supply of euros for sale.d. An increased U.S. demand for euros and a decreased supply of euros for sale.

58. Assume that British corporations begin to purchase more supplies from the U.S. as a result of several labor strikes by British suppliers. This action reflects:

a. An increased demand for British pounds.b. A decrease in the demand for British poundsc. An increase in the supply of British pounds for sale.d. A decrease in the supply of British pounds for sale.

59. Assume that the U.S. places a strict quota on goods imported from China and that China does not retaliate. Holding other factors constant, this event should immediately cause the U.S. demand for Chinese Yuan to _____and the value of the Yuan to_____

a. Increase; appreciateb. Increase; depreciatec. Decrease; depreciated. Decrease; appreciate

60. Any event that increases the U.S. demand for euros should result in a (an) _________ in the value of the euro with respect to ___________, other things being equal.

a. Increase; U.S. dollarb. Increase; non-dollar currenciesc. Decrease; non-dollar currenciesd. Decrease; U.S. dollar

10

61. Any event that reduces the supply of Swiss francs to be exchanged for U.S. dollars should result in a(an) ___________ in the value of the Swiss franc with respect to ________, other things being equal.

a. Increase; U.S. dollarb. Increase; non-dollar currenciesc. Decrease; non-dollar currenciesd. Decrease; U.S. dollar

62. A weak dollar is normally expected to cause:

a. High unemployment and high inflation in the U.S.b. High unemployment and low inflation in the U.S.c. Low unemployment and low inflation in the U.S.d. Low unemployment and high inflation in the U.S.

63. A strong dollar is normally expected to cause:

a. High unemployment and high inflation in the U.S.b. High unemployment and low inflation in the U.S.c. Low unemployment and low inflation in the U.S.d. Low unemployment and high inflation in the U.S.

64. The interest rate of a country with a currency board:

a. Is less stable than it would be without a currency board.b. Is typically below the interest rate of the currency to which it is tied.c. Will move in tandem with the interest rate of the currency to which it is tied.d. Is completely independent of the interest rate of the currency to which it is tied.

65. Assume a central bank sells its currency for other foreign currencies in the foreign exchange market, but does not adjust for the resulting change in the money supply. This is an example of:

a. Pegged intervention.b. Indirect intervention.c. Non-sterilized intervention.d. Sterilized intervention.e. A and D

66. If the Fed desires to weaken the dollar without affecting the dollar money supply, it should:

a. Sell dollars for foreign currencies, and sell equivalent value of its existing Treasury security holdings for dollars.

b. Sell foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars.

c. Sell dollars for foreign currencies, and buy existing Treasury securities with dollars.

d. Sell foreign currencies for dollars, and buy existing Treasury securities with dollars.

11

67. Which of the following is an example of direct intervention in foreign exchange markets?

a. Lowering interest rates.b. Increasing the discount rate.c. Exchanging dollars for foreign currency.d. Imposing barriers on international trade.

68. A strong dollar places__________ pressure on inflation, which in turn places __________ pressure on the dollar.

a. Upward; upwardb. Downward; upwardc. Upward; downwardd. Downward; downward

69. A weaker dollar places ______ pressure on U.S. inflation, which in turn places _____ pressure on U.S. interest rates, which places ______ pressure on U.S. bond prices.

a. Upward; downward; upwardb. Upward; downward; downwardc. Upward; upward; downwardd. Downward; upward; upwarde. Downward; downward; upward

70. To strengthen the dollar using sterilized intervention, the Fed would ____________ dollars and simultaneously _______________ Treasury securities.

a. Buy; sellb. Sell; buyc. Buy; buyd. Sell; sell

71. The term “target zone arrangement” refers to a:

a. Situation where countries adjust their national economic policies to maintain exchange rates within some pre-determined limits.

b. System where several central banks act in a coordinated intervention to keep the price of one country’s currency within reasonable trading ranges.

c. System where currencies are pegged to gold, or to hard currency.d. System where local currencies are replaced by dollars.

72. Which of the following are examples of currency control measures?

a. Import restrictions.b. Prohibition of remittance of funds.c. Ceilings on granting credit to foreign firms.d. Dual/ multiple exchange ratese. All of the above

12

73. If it was determined that current movement of exchange rates was not related to previous exchange rate values, this implies that a ________ will not be valuable for speculating on expected exchange rate movements.

a. Technical forecastingb. Fundamental forecastingc. Market-based forecastingd. Purchasing power parity forecastinge. None of the above

74. An increase in the current account deficit will place ________ pressure on the home currency value, other things equal.

a. Upwardb. Downwardc. Neutrald. Upward or downward based on the size of the deficit

75. If the home currency begins to appreciate against other currencies, this should ___________ the current account balance, other things equal.

a. Increaseb. Have no impact onc. Reduce d. All of the above are equally possible

76. The World Bank was established to:

a. Enhance development solely in Asia through grants.b. Enhance economic development through market interest loans. c. Enhance economic development through low-interest(subsidized) rate loans d. Enhance economic development of the private sector through investment in stock

of corporations.

77. The components of the current account are:

a. Balance on merchandise trade and balance on transfers.b. Balance on merchandise trade and on money market flows.c. Balance of capital market flows and money market flowsd. Balance on goods, services, factors, and transfer payments.

78. The demand for U.S. exports tends to increase when:

a. Economic growth in foreign countries decreases.b. The currencies of foreign countries strengthen against the dollar.c. U.S. inflation rises.d. U.S. income rises.e. None of the above.

13

79. The demand curve for a currency is __________, while the supply curve for a currency is ___________.

a. Upward sloping; downward slopingb. Upward sloping; upward slopingc. Downward sloping; downward slopingd. Downward sloping; upward sloping e. Concave; convex

80. The following agencies help to facilitate international flow of funds except:a. World Bankb. International Finance Corporation (IFC)c. World Trade Organizationd. International Development Association (IDA)e. Bank For International Settlements (BIS)f. International Monetary Fund (IMF)g. Regional Development Banksh. No exception

81. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it is receiving 100,000 Euros in 90 days, it could:

a. Purchase Euros forward for 90-days.b. Sell Euros forward for 90-days.c. Purchase Euros 90 days from now at the spot rate.d. Sell Euros 90 days from now at the spot rate.

82. The international money market primarily concentrates on:

a. Short-term lending (one year or less).b. Medium-term lending (2 to 5 years).c. Long-term lending.d. Placing bonds with investors.e. Placing newly issued stock in foreign markets.

83. The international credit market primarily concentrates on:

a. Short-term lending (one year or less).b. Medium-term lending (2 to 5 years)c. Long-term lending.d. Providing an exchange of foreign currencies for firms who need them.e. Placing newly issued stock in foreign markets.

84. The LIBOR is the:

a. Interest rate commonly charged for loans between banks.b. Average inflation rate in European countries.c. Maximum loan rate ceiling on loans in the international money market.d. Maximum deposit rate ceiling on deposits in the international money market.e. Maximum interest rate offered on bonds that are issued in London.

14

85. A syndicated Euro credit loan:

a. Represents a loan by a single bank to a syndicate of corporations.b. Represents a loan by a single bank to a syndicate of country governments.c. Represents a direct loan by a syndicate of oil exporters to a developing country.d. Represents a loan by a group of banks to borrower.

86. The foreign exchange market is the world’s largest financial market. The size of daily global transaction is about________ in 2010.

a. $200 billion.b. $400 billionc. $1.50 trillion d. $4.00 trillion.e. $9.25 trillion

87. The real interest rate adjusts the nominal interest rate for:

a. Exchange rate movements.b. Income growth.c. Inflation.d. Government controls.e. None of the above

88. If inflation increases substantially in Australia while U.S. inflation remains unchanged, this is expected to place ___________ pressure on the value of the Australian dollar with respect to the U.S. dollar.

a. Upwardb. Downwardc. Either upward or downward depending on the timing of the increase.d. None of the above (there will be no impact)

89. Any event that reduces the U.S. demand for Japanese yen should result in a (an) __________ in the value of the Japanese yen with respect to _______, other things being equal.

a. Increase; U.S dollarb. Increase; non-dollar currenciesc. Decrease; non-dollar currenciesd. Decrease; U.S. dollar

90. Any event that increase the supply of British pounds to be exchanged for U.S. dollars should result in a(an) __________ in the value of the British pound with respect to ________, other things begin equal.

a. Increase; U.S. dollarb. Increase; non-dollar currenciesc. Decrease; non-dollar currenciesd. Decrease; U.S. dollar

15

91. News of a potential surge in U.S. inflation and zero Chilean inflation places ______ pressure on the value of the Chilean peso. The pressure will occur _______

a. Upward; only after the U.S. inflation surgesb. Downward; only after the U.S. inflation surgesc. Upward; immediatelyd. Downward; immediately

92. Assume that Canada places a strict quota on goods imported from the U.S. and that the U.S. does not retaliate. Holding other factors constant, this event should immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to __________ and the value of the Canadian dollar to ___________.

a. Increase; increaseb. Increase; decreasec. Decrease; decreased. Decrease; increase

93. Which of the following is not a factor affecting exchange rates?

a. Relative interest rates.b. Relative inflation rates.c. Government controls.d. Expectations.e. A country’s stock of gold.

94. If a country experiences high inflation relative to the U.S., its exports to the U.S. should __________, its imports should ___________, and there is ____________ pressure on its currency value.

a. Decrease; increase; upwardb. Decrease; decrease; upwardc. Increase; decrease; downwardd. Decrease; increase; downwarde. Increase; decrease; upward

95. To strengthen the dollar using sterilized intervention, the Fed would __________ dollars and simultaneously ____________ Treasury Securities.

a. Buy; sellb. Sell; buyc. Buy; buyd. Sell; sell

16

96. The following are factors contributing to a strong domestic currency except:

a. Relatively higher interest rate (real) in home country than abroad b. A domestic trade surplus c. Relatively lower rates of inflation e. Strong /vibrant domestic financial market f. Relatively strong domestic economy g. Sound domestic monetary policy focused on price stability h. No record of default on government debt i. No exception

97. The following are factors contributing to a weak domestic currency except:

a. Relatively lower interest rate (real) in home country than abroad b. A domestic trade deficit c. Relatively higher rates of inflation e. Weak/collapsing domestic financial market f. Relatively weak domestic economy g. Unpredictable domestic monetary policy h. Record of default on government debt i. No exception

98. A MNC’s short-term financing needs are most likely to be satisfied in the _____ market while medium-term needs are most likely to be satisfied in the ______ market.

a. International money; international creditb. International money; international bondc. International money; international stockd. International credit; international moneye. International bond; international credit

99. A MNC’s long-term financing needs are most likely to be satisfied in the _____ market and the ______ market.

a. International money; international creditb. International money; international bondc. International bond; international stockd. International bond; international credite. International credit; international money

100. Assume that Bank America’s bid price for the Danish kroner is $/k = 0.1875 and it’s ask rate is $/k = 0.1895. If you convert $1000 to Danish kroner (k) and you immediately turn around and convert the Danish kroner back to dollars, how many dollars will you have left?

a. $500b. $1000c. $998.37d. $989.45e. None of the above

17

101. Most trading activity in the foreign exchange market is dominated by: a. Currency trade among central banks b. Trading by financial institutions c. Interbank trading d. Trading currency between importer and exporters e. Both a and c.

102. Which of the following is not a major currency trading center? a. London b. New York c. Tokyo d. Singapore e. Chicago

18

PART B

1. During 2009 the following were the only autonomous transactions that took place between the U.S. and the rest of the world. 1) Americans bought $20m worth of Kuwait oil.2) The Russians bought $25m worth of U.S. beef.3) Americans invested $5m in British stocks.4) An American bought a factory in Japan for $40m.5) The U.S. gave Egypt $10m in foreign aid.6) A Japanese bought a hotel in Hawaii for $20m7) American Banks paid $5m in interests to German investors.8) U.S. residents gave $15m to their relatives in Mexico.9) A French firm bought $30m worth of US commercial paper.10) The Japanese invested $45m in U.S. Certificates of Deposit.11) U.S. software engineers received $8m in consulting fees from Brazil.12) Geico (USA) paid $14m reinsurance premium to the Lloyds of London. 13) Japanese visitors spent $7m at Orlando theme parks.14) British investors bought $20m worth of US bonds.15) Americans invested $12m in German money markets.

16) AT&T sold $21m telecom equipment to Brazil.

Calculate U.S. Trade, Current Account, Basic, and Performance balances for 2009.

2. The XYZ bank of US expects the Swiss franc to depreciate against the dollar from its current spot rate of $.6770 to $.6195 (per unit) in 20 days. The following rates are available in the interbank market. All rates are compounded daily on a 360 days /year basis.

LENDING RATE BORROWING RATEU.S. 6.2 6.7

Switzerland 6.0 6.5Assume that the bank has a borrowing capacity of either $10m or SF 15m in the interbank market.

How could XYZ capitalize on its expectation without using deposited funds? Estimate possible profits from this exercise.

3. XYZ bank of US expects the Swiss franc to appreciate against the dollar from its current spot rate of $.66467 to $.73114 in 60 days. The following rates are available in the interbank market. All rates are compounded daily on a 360 days /year basis.

LENDING RATE BORROWING RATEU.S. 5.5 6.0

Switzerland 5.2 5.8

Assume that the bank has a borrowing capacity of either $10m or SF 15m in the interbank market.

How could XYZ capitalize on its expectation without using deposited funds? Estimate possible profits from this exercise.

19

Answers to Problem Set I

1. A 26. C 51. E 76. B 2. E 27. C 52. D 77. D3. C 28. C 53. E 78. B4. E 29. F 54. B 79. D5. A 30. A 55. B 80. H6. A 31. C 56. A 81. B7. E 32. E 57. D 82. A8. C 33. C 58. C 83. B9. B 34. D 59. C 84. A10. A 35. D 60. A 85. D11. C 36. D 61. A 86. D12. C 37. B 62. D 87. C13. D 38. B 63. B 88. B14. B 39. C 64. C 89. D15. E 40. B 65. C 90. D16. E 41. D 66. A 91. C17. B 42. C 67. C 92. D18. C 43. C 68. B 93. E19. C 44. A 69. C 94. D20. B 45. B 70. C 95. C21. A 46. D 71. A 96. I22. B 47. E 72. E 97. I23. A 48. B 73. A 98 A24. D 49. C 74. B 99. C25. D 50. D 75. C 100. D

20