Ch004
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
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
Page 1
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