Fin 582 Chapter 8 Exam Questions and Answers All Correct

Fin 582 Chapter 8 Exam Questions and Answers All Correct There is much evidence to suggest that Japanese investors invest in U.S. Treasury securities when U.S. interest rates are higher than Japanese interest rates. These investors most likely believe in the international Fisher effect. - Answer-False The relative form of purchasing power parity (PPP) accounts for the possibility of market imperfections such as transportation costs, tariffs, and quotas in establishing a relationship between inflation rates and exchange rate changes. - Answer-True According to the international Fisher effect (IFE), the exchange rate percentage change should be approximately equal to the differential in income levels between two countries. - Answer-False Research indicates that deviations from purchasing power parity (PPP) are reduced over the long run. - Answer-True The IFE theory suggests that foreign currencies with relatively high interest rates will appreciate because the high nominal interest rates reflect expected inflation. - Answer- False If the IFE theory holds, that means that covered interest arbitrage is not feasible - Answer-False If interest rate parity holds, and the international Fisher effect (IFE) holds, foreign currencies with relatively high interest rates should have forward discounts and those currencies would be expected to depreciate. - Answer-True Interest rate parity can only hold if purchasing power parity holds. - Answer-False If interest rate parity holds, then the international Fisher effect must hold. - Answer- False The international Fisher effect (IFE) suggests that the currencies with relatively high interest rates will appreciate because those high rates will attract investment and increase the demand for that currency. - Answer-False If purchasing power parity holds, then the Fisher effect must also hold. - Answer-False If the international Fisher effect (IFE) holds, the local investors are expected to earn the same return from investing internationally as they would from investing in their local markets. - Answer-True Assume that inflation in the U.S. is expected to be 9%, while inflation in Australia is expected to be 5% over the next year. Today you receive an offer to purchase a one- year put option for $.03 per unit on Australian dollars at a strike price of $0.72. Today the Australian dollar is quoted at $0.70. You believe that purchasing power parity holds. You should accept the offer. - Answer-False