Fin 582 Chapter 8 Exam Questions and Answers

Fin 582 Chapter 8 Exam Questions and Answers 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. - AnswerFalse 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. - AnswerFalse 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