FIN 582 Chapter 8 Quiz Questions with Correct Answers

FIN 582 Chapter 8 Quiz Questions with Correct Answers According to the IFE, if British interest rates are lower than U.S. interest rates a. the British inflation rate will decrease. b. the British pound will appreciate against the dollar. c. the British pound will depreciate against the dollar. d. today's forward rate of the British pound will equal today's spot rate. e. the British pound's value will remain constant. - Answer-b. the British pound will appreciate against the dollar. If interest rates on the euro are consistently above U.S. interest rates, then for the international Fisher effect (IFE) to hold a. the value of the euro would often depreciate against the dollar. b. the value of the euro would remain constant most of the time. c. the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation. d. the value of the euro would often appreciate against the dollar. - Answer-a. the value of the euro would often depreciate against the dollar. Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and a. the inflation differential. b. the forward discount or premium. c. the income differential. d. none of the above - Answer-a. the inflation differential. Assume that U.S. and Argentine investors require a real return of 2 percent. If the U.S. nominal interest rate is 5 percent, and Argentina's nominral interest rate is 7 percent, then according to the IFE, the Argentine inflation rate is expected to be about ____ the U.S. inflation rate, and the Argentine peso is expected to ____. a. 3 percentage points below; appreciate by about 3 percent b. 3 percentage points above; depreciate by about 3 percent c. 2 percentage points above; depreciate by about 2 percent d. 3 percentage points below; depreciate by about 3 percent e. 2 percentage points below; appreciate by about 2 percent - Answer-c. 2 percentage points above; depreciate by about 2 percent Assume that the Canadian inflation rate is expected to exceed the U.S. inflation rate over the next year. If interest rate parity and the international Fisher effect theories hold, then the one-year forward rate of the Canadian dollar will exhibit a _______, and the spot rate of the Canadian dollar will _____________ over the next year. a. premium; appreciate b. discount; depreciate c. premium; depreciate d. discount; appreciate - Answer-b. discount; depreciate