Ch004

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  • Topic: Foreign exchange market, Futures contract, Exchange rate
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  • Published : May 12, 2013
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FINA 5331 Quiz #4

Name: __________________________ Date: _____________

1. Covered Interest Parity (CIP) is best defined as: A) When a government brings its domestic interest rate in line with other major financial markets B) When the central bank of a country brings its domestic interest rate in line with its major trading partners C) An arbitrage condition that must hold when international financial markets are in equilibrium D) None of the above

2. When Covered Interest Parity (CIP) holds between two different countries X and Y, your decision to invest your money will: A) B) C) D) be indifferent between country X and country Y involve a forward hedging depend on which country initiated the IRP a and b

3. When Covered Interest Parity (CIP) does not hold A) B) C) D) there is a high degree of inflation the financial markets are in equilibrium there are opportunities for covered interest arbitrage b and c

4. Covered Interest Arbitrage (CIA) activities will result in A) B) C) D) an unstable international financial markets restoring equilibrium quite quickly a disintermediation no effect on the market

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5. Purchasing Power Parity (PPP) theory states that: A) The exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels. B) As the purchasing power of a currency sharply declines (due to hyperinflation) that currency will depreciate against stable currencies. C) The prices of standard commodity baskets in two countries are not related. D) a and b

6. According to the monetary approach, what matters in the exchange rate determination are A) B) C) D) The relative money supplies The relative velocities of monies The relative national outputs All of the above

Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate, with oneyear maturity, is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000 or €892,857 (which is the equivalent of $1,000,000 at the spot exchange rate of $1.12/€).

7. The above mentioned scenario A) is an example of covered interest arbitrage (CIA), and interest rate parity (IRP) holds B) is an example of covered interest arbitrage (CIA), and interest rate parity (IRP) does NOT hold C) is an example of Purchasing Power Parity (PPP), and hyperinflation D) none of the above

8. The net cash flow in one year is A) B) C) D) $10,690 $15,000 $46,207 $22,000

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9. Cross-correlations among major stock markets and exchange markets are: A) B) C) D) relatively high relatively low essentially perfect practically zero

10. Comparing "forward" and "futures" exchange contracts, we can say that: A) they are both "marked-to-market" daily B) their major difference is in the way the underlying asset is priced for future purchase or sale C) a futures contract is negotiated by open outcry between floor brokers or traders and is traded on organized exchanges, while forward contract is tailor-made by an international bank for its clients and is traded OTC D) b and c

11. In reference to the derivatives market, a "speculator" A) attempts to profit from a change in the futures price B) wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position C) plays a zero-sum game D) a and c

12. The "open interest" shown in currency futures quotations is: A) the total number of people indicating interest in buying the contracts in the near future B) the total number of people indicating interest in selling the contracts in the near future C) the total number of people indicating interest in buying or selling the contracts in the near future D) the total number of long or short contracts outstanding for the particular delivery month

13. An "option" is: A) a contract giving the seller (writer) the right, but...
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