1、Eun/Resnick 4e 62Eun invest at i = 6%; translate proceeds back at forward rate of $1.20 = 1.00, gross proceeds = $1,017,600.b) Borrow 800,000 at i = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate 848,000 back into euro at the forward rate of $1.20 = 1.00.
2、 Net profit $2,400.c) Borrow 800,000 at i = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate 850,000 back into euro at the forward rate of $1.20 = 1.00. Net profit 2,000.d) Answers c) and b) are both correctAnswer: d)Rationale: b) is true: $1.25Grospcedsino
3、lar =80,(.0)$1,20t iu 84,(.6).slrs,71net pofi da =$,02$0$2,40c) is also true: .5.8,(.)85,5,16,Theres nothing in the problem to suggest that profits have to be in a particular currency.8 Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest for six months. You are considering
4、 the purchase of U.S. T-bills that yield 1.810% (thats a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = 100, and the six month forward rate is $1.00 = 110. The interest rate in Japan (on an investment of comparable risk) is 13 percen
5、t. What is your strategy?a) take $1m, invest in U.S. T-billsb) take $1m, translate into yen at the spot, invest in Japan, repatriate your yen earnings back into dollars at the spot rate prevailing in six months.c) take $1m, translate into yen at the spot, invest in Japan, hedge with a short position
6、 in the forward contractd) take $1m, translate into yen at the forward rate, invest in Japan, hedge with a short position in the spot contractAnswer: c)Eun/Resnick 4e 659 A U.S.-based currency dealer has good credit and can borrow $1,000,000 for one year. The one-year interest rate in the U.S. is i$
7、 = 2% and in the euro zone the one-year interest rate is i = 6%. The spot exchange rate is $1.25 = 1.00 and the one-year forward exchange rate is $1.20 = 1.00. Show how to realize a certain dollar profit via covered interest arbitrage.a) Borrow $1,000,000 at 2%. Trade $1,000,000 for 800,000; invest
8、at i = 6%; translate proceeds back at forward rate of $1.20 = 1.00, gross proceeds = $1,017,600.b) Borrow 800,000 at i = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate 848,000 back into euro at the forward rate of $1.20 = 1.00. Net profit $2,400.c) Borrow
9、 800,000 at i = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate 850,000 back into euro at the forward rate of $1.20 = 1.00. Net profit 2,000.d) Answers c) and b) are both correctAnswer: b)Rationale: $1.25Gros pceds inolar =80,(.0)$1,20tiu84,(.6).s lrs ,71n
10、etpofida= $,02$0$2,4010 An Italian currency dealer has good credit and can borrow 800,000 for one year. The one-year interest rate in the U.S. is i$ = 2% and in the euro zone the one-year interest rate is i = 6%. The spot exchange rate is $1.25 = 1.00 and the one-year forward exchange rate is $1.20
11、= 1.00. Show how to realize a certain euro-denominated profit via covered interest arbitrage.a) Borrow $1,000,000 at 2%. Trade $1,000,000 for 800,000; invest at i = 6%; translate proceeds back at forward rate of $1.20 = 1.00, gross proceeds = $1,017,600.b) Borrow 800,000 at i = 6%; translate to doll
12、ars at the spot, invest in the U.S. at i$ = 2% for one year; translate 848,000 back into euro at the forward rate of $1.20 = 1.00. Net profit $2,400.c) Borrow 800,000 at i = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate 850,000 back into euro at the forw
13、ard rate of $1.20 = 1.00. Net profit 2,000.d) Answers c) and b) are both correctAnswer: c)Rationale: $1.251.080,(.)85,00$25,6,11 Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest for Eun/Resnick 4e 66six months. You are considering the purchase of U.S. T-bills that yield
14、 1.810% (thats a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = 100, and the six month forward rate is $1.00 = 110. What must the interest rate in Japan (on an investment of comparable risk) be before you are willing to consider inve
15、sting there for six months?a) 11.991%b) 1.12%c) 7.45%d) 7.45%Answer: a)Rationale: The no-arbitrage condition is $1,000,000 (1.0181) = $1,000,000 (1 + i ) 0.1$10.$1.0181 = (1 + i ) 0.1$i = 1.0181 1.0.$i = 11.991%12 Covered Interest Arbitrage (CIA) activities will result in a) an unstable internationa
16、l financial marketsb) restoring equilibrium quite quicklyc) a disintermediationd) no effect on the marketAnswer: b).13 Suppose that the one-year 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 one-year forward exchange r
17、ate, is $1.16/. Assume that an arbitrageur can borrow up to $1,000,000.a) This is an example where interest rate parity holds.b) This is an example of an arbitrage opportunity; interest rate parity does NOT hold.c) This is an example of a Purchasing Power Parity violation and an arbitrage opportunit
18、y.d) None of the above. Answer: b)Rationale: equation 6.1: $1(/)iFSEun/Resnick 4e 6714 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 one-year maturity, is $1.16/. Ass
19、ume that an arbitrager can borrow up to $1,000,000. If an astute trader finds an arbitrage, what is the net cash flow in one year?a) $10,690b) $15,000c) $46,207d) $21,964.29Answer: d)Rationale: $21,964.29 = $1,000,000 (1.05) + $1,000,000 (1.035) 12.$00.16$Interest Rate Parity and Exchange Rate Deter
20、mination15 Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and the one-year forward exchange rate is $1.16/. What must the spot exchange rate be? a) $1.1768/ b) $1.1434/.c) $1.12/ d) None of the above. Answer: b)Rationale: equation 6.1: $1(/).6
21、/1.05($/)1.43/()3iFSSS16 A higher U.S. interest rate (i$ ) will result in a) a stronger dollarb) a lower spot exchange rate (expressed as foreign currency per U.S. dollar)c) both a) and b)d) None of the aboveAnswer: a)Rationale: all else equal, a higher U.S. interest rate will attract capital to the
22、 U.S., increasing demand for dollars, which leads to a stronger dollar (and a lower spot rate when the sport rate is quoted as the number of U.S. dollars per unit of foreign currency).17 If the interest rate in the U.S. is i$ = 5 percent for the next year and interest rate in the U.K. is i = 8 perce
23、nt for the next year, uncovered IRP suggests that a) The pound is expected to depreciate against the dollar by about 3 percent.b) The pound is expected to appreciate against the dollar by about 3 percent.c) The dollar is expected to appreciate against the pound by about 3 percent.d) a) and c) are bo
24、th trueAnswer: d)Eun/Resnick 4e 6818 A currency dealer has good credit and can borrow either $1,000,000 or 800,000 for one year. The one-year interest rate in the U.S. is i$ = 2% and in the euro zone the one-year interest rate is i = 6%. The one-year forward exchange rate is $1.20 = 1.00; what must
25、the spot rate be to eliminate arbitrage opportunities?a) $1.2471 = 1.00b) $1.20 = 1.00c) $1.1547 = 1.00d) none of the aboveAnswer:Rationale: $1.20.6(/)($/)1FiS Reasons for Deviations from Interest Rate Parity19 Will an arbitrageur facing the following prices be able to make money?borrowing lending B
26、id Ask$ 5% 4.5% Spot $1.00 = 1.00 $1.01 = 1.00 6% 5.5% Forward $0.99 = 1.00 $1.00 = 1.00a) Yes, borrow $1,000 at 5%; Trade for at the ask spot rate $1.01 = 1.00; Invest 990.10 at 5.5%; Hedge this with a forward contract on 1,044.55 at $0.99 = 1.00; Receive $1.034.11b) Yes, borrow 1,000 at 6%; Trade
27、for $ at the bid spot rate $1.00 = 1.00; Invest $1,000 at 4.5%; Hedge this with a forward contract on 1,045 at $1.00 = 1.00.c) No; the transactions costs are too highd) None of the aboveAnswer: c)20 If IRP fails to holda) Pressure from arbitrageurs should bring exchange rates and interest rates back
28、 into lineb) It may fail to hold due to transactions costsc) It may be due to government-imposed capital controlsd) All of the aboveAnswer d)21 Although IRP tends to hold, it may not hold precisely all the timea) Due to transactions costs, like the bid ask spreadb) Due to asymmetric informationc) Du
29、e to capital controls imposed by governmentsd) a) and c)Answer: d)Eun/Resnick 4e 69Purchasing Power Parity22 If a foreign county experiences a hyperinflationa) Its currency will depreciate against stable currenciesb) Its currency may appreciate against stable currenciesc) Its currency may be unaffec
30、tedits difficult to say.d) None of the aboveAnswer: a)23 As of today, the spot exchange rate is 1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward rate that should prevail?a) 1.00 = $1.2379b) 1.00 = $1
31、.2623c) 1.00 = $0.9903d) $1.00 = 1.2623Answer: a)Rationale: Take the spot rate and gross up each side by the respective inflation rates1.03$1.250.379.24 Purchasing Power Parity (PPP) theory states that:a) The exchange rate between currencies of two countries should be equal to the ratio of the count
32、ries 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)Answer: d)PPP Deviations and the Real Exchange Rate25 I
33、f the annual inflation rate is 5.5 percent in the United States and 4 percent in the U.K., and the dollar depreciated against the pound by 3 percent, then the real exchange rate, assuming that PPP initially held, is: a) 0.07b) 0.98c) 0.0198d) 4.5Answer: b)Rationale: Equation 6.14:$11.05.982()34qeEun
34、/Resnick 4e 70Evidence on Purchasing Power Parity26 In view of the fact that PPP is the manifestation of the law of one price applied to a standard commodity basket, a) It will hold only if the prices of the constituent commodities are equalized across countries in a given currencyb) It will hold on
35、ly if the composition of the consumption basket is the same across countries.c) Both a) and b)d) None of the aboveAnswer: c)27 Some commodities never enter into international trade. Examples include:a) Nontradablesb) Haircutsc) Housingd) All of the aboveAnswer: d)28 Generally unfavorable evidence on
36、 PPP suggests thata) Substantial barriers to international commodity arbitrage existb) Tariffs and quotas imposed on international trade can explain at least some of the evidencec) Shipping costs can make it difficult to directly compare commodity pricesd) All of the aboveAnswer: d)29 The price of a
37、 McDonalds Big Mac sandwicha) Is about the same in the 120 countries that McDonalds does business inb) Varies considerably across the world in dollar terms c) Supports PPPd) None of the aboveAnswer: b)Rationale: One explanation is that a big mac will cost more in Hawaii than Iowa because you first h
38、ave to buy the cow an airplane ticket. Fisher Effects30 The Fisher effect can be written for the United States as:a) i$ = $ + E($) +$ E($)b) $ = i$ + E($) +i$ E($)c) 1(qed) $/)iFSAnswer: a)31 Forward parity states thatEun/Resnick 4e 71a) Any forward premium or discount is equal to the expected chang
39、e in the exchange rate. b) Any forward premium or discount is equal to the actual change in the exchange ratec) The nominal interest rate differential reflects the expected change in the exchange rate. d) An increase (decrease) in the expected inflation rate in a country will cause a proportionate i
40、ncrease (decrease) in the interest rate in the country.Answer: a)32 The International Fisher Effect suggests thata) Any forward premium or discount is equal to the expected change in the exchange rate. b) Any forward premium or discount is equal to the actual change in the exchange ratec) The nomina
41、l interest rate differential reflects the expected change in the exchange rate. d) An increase (decrease) in the expected inflation rate in a country will cause a proportionate increase (decrease) in the interest rate in the country.Answer: c)33 The Fisher effect states that:a) Any forward premium o
42、r discount is equal to the expected change in the exchange rate. b) Any forward premium or discount is equal to the actual change in the exchange ratec) The nominal interest rate differential reflects the expected change in the exchange rate. d) An increase (decrease) in the expected inflation rate
43、in a country will cause a proportionate increase (decrease) in the interest rate in the country.Answer: d)Forecasting Exchange Rates34 If you could accurately and consistently forecast exchange ratesa) This would be a very handy thing.b) You could impress your dates.c) You could make a great deal of
44、 money.d) All of the aboveAnswer: d)Rationale: What date wouldnt be impressed with “Hey baby, in three months the euro will appreciate by 5 percent against the dollar.”?Eun/Resnick 4e 7235 The main approaches to forecasting exchange rates are:a) Efficient market, Fundamental, and Technical approache
45、sb) Efficient market and Technical approachesc) Efficient market and Fundamental approachesd) Fundamental and Technical approachesAnswer: a)36 The benefit to forecasting exchange rates:a) Are greatest during periods of fixed exchange ratesb) Are nonexistent now that the euro and dollar are the bigge
46、st game in townc) Accrue to and are a vital concern for MNCs formulating international sourcing, production, financing and marketing strategies.d) All of the above.Answer: c)Efficient Market Approach37 The Efficient Markets Hypothesis statesa) Markets tend to evolve to low transactions costs and spe
47、edy execution of orders.b) Current asset prices (e.g. exchange rates) fully reflect all the available and relevant information.c) Current exchange rates cannot be explained by such fundamental forces as money supplies, inflation rates and so forth.d) None of the aboveAnswer: b)38 Good, inexpensive,
48、and fairly reliable predictors of future exchange rates include:a) Todays exchange rate.b) Current forward exchange rates (e.g. the six-month forward rate is a pretty good predictor of the spot rate that will prevail six months from today).c) Esoteric fundamental models that take an econometrician t
49、o use and no one can explain.d) Both a) and b)Answer: d)39 If the exchange rate follows a random walka) The future exchange rate is unpredictableb) The future exchange rate is expected to be the same as the current exchange rate, St = E(St+1)c) The best predictor of future exchange rates is the forward rate Ft = E(St+1|It).d) b) and c)Answer: b)Rationale: c) is wrong because the forward rate model is d
