IN 535 Week 11 Final Exam Part 1 Question 1 The international Fisher effect (IFE) suggests that: Answer a home currency will depreciate if the current home interest 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. Question 2 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) Question 3 Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries? Answer If Country A’s inflation rate exceeds Country B’s inflation rate, Country A’s currency will weaken. If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency will weaken. If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency will strengthen. If Country B’s inflation rate exceeds Country A’s inflation rate, Country A’s currency will weaken. Question 4 If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher effect (IFE) to hold: Answer the value of the euro would often appreciate against the dollar. the value of the euro would often depreciate against the dollar. the value of the euro would remain constant most of the time. the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation. Question 5 If today’s exchange rate reflects any historical trends in Canadian dollar exchange rate movements, but not all relevant public information, then the Canadian dollar market is: Answer weak-form efficient. semistrong-form efficient. strong-form efficient. semiweak-form efficient. Question 6 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. Question 7 If a foreign currency is expected to ____ substantially against the parent’s currency, the parent may prefer to ____ the remittance of subsidiary earnings. Answer weaken; delay weaken; expedite appreciate; expedite appreciate; delay Question 8 Which of the following is not one of the major reasons for MNCs to forecast exchange rates? Answer to decide in which foreign market to invest the excess cash. to decide where to borrow at the lowest cost. to determine whether to require the subsidiary to remit the funds or invest them locally. to speculate on the exchange rate movements. Question 9 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 to improve your forecast. 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. Question 10 The maximum one-day loss computed for the value-at-risk (VAR) method does not depend on: Answer the expected percentage change in the currency for the next day. the standard deviation of the daily percentage changes in the currency over a previous period. the current level of interest rates. the confidence level used. Question 11 Which of the following is not a form of exposure to exchange rate fluctuations? Answer transaction exposure. credit exposure. economic exposure. translation…
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