FIN 4213 Exam 1 Guide 2027: MNC & Forex
Practice Q&A
Exam
Assume that interest rate parity holds, and the euro's interest rate is 9% while the
U.S. interest rate is 12%. Then the euro's interest rate increases to 11% while the
U.S. interest rate remains the same. As a result of the increase in the interest rate
on euros, the euro's forward ____ will ____ in order to maintain interest rate
parity.
a. discount; increase
b. discount; decrease
c. premium; increase
d. premium; decrease - answer-D
National Bank quotes the following for the British pound and the New Zealand
dollar: Quoted Bid Price, Quoted Ask Price
Value of a British pound (£) in $ $1.55 $1.57
Value of a New Zealand dollar (NZ$) in $ $0.50 $0.52
Value of a British pound in New Zealand dollars NZ$2.90 NZ$2.92 Assume you
have $10,000 to conduct triangular arbitrage. What is your profit from
implementing this strategy? - answer-Determine the implied ("should-be") value
of £ in NZ$ (e.g., bid price) exchange £ for $ (sell £), then exchange $ for NZ$(buy
NZ$):
,the implied bid of £ in NZ$ = Quoted bid of £ in $ / Quoted ask of NZ$ in $ =
($1.55/£)/($0.52/NZ$) = NZ$2.98/£, which is higher than the quoted bid price of £
in NZ$, NZ$2.90/£.
So £ is undervalued relative to NZ$, i.e., NZ$ is overvalued relative to £.
One should sell NZ$ in exchange for £. Then, to implement the triangular
arbitrage,
1. Exchange $ for NZ$: $10,000 /($0.52/NZ$) = NZ$19,230.77
2. Exchange NZ$ for £: NZ$19,230.77/(NZ$2.92/£) = £6,585.88
3. Exchange £ for $: £6,585.88 × $1.55/£ = $10,208.11 Thus, the profit is
$10,208.11 - $10,000 =$208.11
The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 9%. The
current exchange rate for the Japanese yen (¥) is $0.0075. After supply and
demand for the Japanese yen has adjusted in the manner suggested by
purchasing power parity, what should be the new exchange rate for the yen? -
answer-% change in yen's exchange rate: (1+0.03)/(1+0.09) - 1 = -5.5%, The new
exchange rate of yen: $.0075 × (1-5.5%) = $.0071 Or, in one step, $.0075 ×
(1+0.03)/(1+0.09) = $.0071
If nominal British interest rates are 3% and nominal U.S. interest rates are 6%,
then according to the international Fisher effect (IFE), is the British pound (£)
expected to depreciate or appreciate? By how much? - answer-(1.06/1.03) - 1 =
2.9%. Appreciate by 2.9%
The interest rate in the U.K. is 7%, while the interest rate in the U.S. is 5%. The
spot rate for the British pound is $1.50. According to the international Fisher
effect (IFE), the British pound should adjust to a new level of:
a. $1.47.
b. $1.53.
, c. $1.43.
d. $1.57. - answer-A. (1+0.05)/(1+0.07) - 1 = -1.87%, $1.5 × (1−1.87%) = $1.47; or
$1.5 × (1+0.05)/(1+0.07) = $1.47
Which of the following is not true regarding IRP, PPP, and the IFE?
a. IRP suggests that a currency's spot rate will change according to interest rate
differentials.
b. PPP suggests that a currency's spot rate will change according to inflation
differentials.
c. The IFE suggests that a currency's spot rate will change according to interest
rate differentials.
d. All of the above are true. - answer-A
Which of the following theories suggests that the percentage change in spot
exchange rate of a currency should be equal to the inflation differential between
two countries?
a. purchasing power parity (PPP).
b. triangular arbitrage.
c. international Fisher effect (IFE).
d. interest rate parity (IRP). - answer-A
According to IFE, if british int rates exceed US int rates
a. the British pound's value will remain constant.
b. the British pound will depreciate against the dollar.
c. the British pound will appreciate against U.S. dollar.
d. the forward rate of the British pound will contain a discount.
Practice Q&A
Exam
Assume that interest rate parity holds, and the euro's interest rate is 9% while the
U.S. interest rate is 12%. Then the euro's interest rate increases to 11% while the
U.S. interest rate remains the same. As a result of the increase in the interest rate
on euros, the euro's forward ____ will ____ in order to maintain interest rate
parity.
a. discount; increase
b. discount; decrease
c. premium; increase
d. premium; decrease - answer-D
National Bank quotes the following for the British pound and the New Zealand
dollar: Quoted Bid Price, Quoted Ask Price
Value of a British pound (£) in $ $1.55 $1.57
Value of a New Zealand dollar (NZ$) in $ $0.50 $0.52
Value of a British pound in New Zealand dollars NZ$2.90 NZ$2.92 Assume you
have $10,000 to conduct triangular arbitrage. What is your profit from
implementing this strategy? - answer-Determine the implied ("should-be") value
of £ in NZ$ (e.g., bid price) exchange £ for $ (sell £), then exchange $ for NZ$(buy
NZ$):
,the implied bid of £ in NZ$ = Quoted bid of £ in $ / Quoted ask of NZ$ in $ =
($1.55/£)/($0.52/NZ$) = NZ$2.98/£, which is higher than the quoted bid price of £
in NZ$, NZ$2.90/£.
So £ is undervalued relative to NZ$, i.e., NZ$ is overvalued relative to £.
One should sell NZ$ in exchange for £. Then, to implement the triangular
arbitrage,
1. Exchange $ for NZ$: $10,000 /($0.52/NZ$) = NZ$19,230.77
2. Exchange NZ$ for £: NZ$19,230.77/(NZ$2.92/£) = £6,585.88
3. Exchange £ for $: £6,585.88 × $1.55/£ = $10,208.11 Thus, the profit is
$10,208.11 - $10,000 =$208.11
The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 9%. The
current exchange rate for the Japanese yen (¥) is $0.0075. After supply and
demand for the Japanese yen has adjusted in the manner suggested by
purchasing power parity, what should be the new exchange rate for the yen? -
answer-% change in yen's exchange rate: (1+0.03)/(1+0.09) - 1 = -5.5%, The new
exchange rate of yen: $.0075 × (1-5.5%) = $.0071 Or, in one step, $.0075 ×
(1+0.03)/(1+0.09) = $.0071
If nominal British interest rates are 3% and nominal U.S. interest rates are 6%,
then according to the international Fisher effect (IFE), is the British pound (£)
expected to depreciate or appreciate? By how much? - answer-(1.06/1.03) - 1 =
2.9%. Appreciate by 2.9%
The interest rate in the U.K. is 7%, while the interest rate in the U.S. is 5%. The
spot rate for the British pound is $1.50. According to the international Fisher
effect (IFE), the British pound should adjust to a new level of:
a. $1.47.
b. $1.53.
, c. $1.43.
d. $1.57. - answer-A. (1+0.05)/(1+0.07) - 1 = -1.87%, $1.5 × (1−1.87%) = $1.47; or
$1.5 × (1+0.05)/(1+0.07) = $1.47
Which of the following is not true regarding IRP, PPP, and the IFE?
a. IRP suggests that a currency's spot rate will change according to interest rate
differentials.
b. PPP suggests that a currency's spot rate will change according to inflation
differentials.
c. The IFE suggests that a currency's spot rate will change according to interest
rate differentials.
d. All of the above are true. - answer-A
Which of the following theories suggests that the percentage change in spot
exchange rate of a currency should be equal to the inflation differential between
two countries?
a. purchasing power parity (PPP).
b. triangular arbitrage.
c. international Fisher effect (IFE).
d. interest rate parity (IRP). - answer-A
According to IFE, if british int rates exceed US int rates
a. the British pound's value will remain constant.
b. the British pound will depreciate against the dollar.
c. the British pound will appreciate against U.S. dollar.
d. the forward rate of the British pound will contain a discount.
