Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates

Chapter 06
International Parity Relationships and Forecasting Foreign Exchange Rates

Multiple Choice Questions

1. An arbitrage is best defined as
A. A legal condition iposed by the CF!C.
". !he act of si#ltaneo#sly b#ying and selling the sae or e$#i%alent assets or coodities
for the p#rpose of a&ing reasonable profits.
C. !he act of si#ltaneo#sly b#ying and selling the sae or e$#i%alent assets or coodities
for the p#rpose of a&ing g#aranteed profits.
'. (one of the abo%e

). Interest Rate Parity *IRP+ is best defined as
A. ,hen a go%ernent brings its doestic interest rate in line -ith other a.or financial
ar&ets.
". ,hen the central ban& of a co#ntry brings its doestic interest rate in line -ith its a.or
trading partners.
C. An arbitrage condition that #st hold -hen international financial ar&ets are in
e$#ilibri#.
'. (one of the abo%e

/. ,hen Interest Rate Parity *IRP+ does not hold
A. there is #s#ally a high degree of inflation in at least one co#ntry.
". the financial ar&ets are in e$#ilibri#.
C. there are opport#nities for co%ered interest arbitrage.
'. both b+ and c+

0. 1#ppose yo# obser%e a spot exchange rate of 21.3045. If interest rates are 36 APR in the
7.1. and /6 APR in the e#ro 8one9 -hat is the no-arbitrage 1-year for-ard rate:
A. 51.3);142
". 21.3);145
C. 51.0<1042
'. 21.0<1045

6-1
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any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
3. 1#ppose yo# obser%e a spot exchange rate of 21.3045. If interest rates are /6 APR in the
7.1. and 36 APR in the e#ro 8one9 -hat is the no-arbitrage 1-year for-ard rate:
A. 51.3);142
". 21.3);145
C. 51.0<1042
'. 21.0<1045

6. 1#ppose yo# obser%e a spot exchange rate of 2).004A. If interest rates are 36 APR in the
7.1. and )6 APR in the 7.B.9 -hat is the no-arbitrage 1-year for-ard rate:
A. A).03CC42
". 2).03CC4A
C. A1.;0);42
'. 21.;0);4A

<. A foral stateent of IRP is
A.
".
C.
'.

C. 1#ppose that the one-year interest rate is 3.0 percent in the 7nited 1tatesD the spot exchange
rate is 21.)045D and the one-year for-ard exchange rate is 21.1645. ,hat #st one-year
interest rate be in the e#ro 8one to a%oid arbitrage:
A. 3.06
". 6.0;6
C. C.6)6
'. (one of the abo%e

6-)
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any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
;. 1#ppose that the one-year interest rate is /.0 percent in the Italy9 the spot exchange rate is
21.)0459 and the one-year for-ard exchange rate is 21.1C45. ,hat #st one-year interest rate
be in the 7nited 1tates:
A. 1.)C//6
". 1.01)C6
C. 0.<36
'. (one of the abo%e

10. 1#ppose that the one-year interest rate is 0.0 percent in the Italy9 the spot exchange rate is
21.60459 and the one-year for-ard exchange rate is 21.3C45. ,hat #st one-year interest rate
be in the 7nited 1tates:
A. )6
". ).<6
C. 3./)6
'. (one of the abo%e

11. Co%ered Interest Arbitrage *CIA+ acti%ities -ill res#lt in
A. an #nstable international financial ar&ets.
". restoring e$#ilibri# $#ite $#ic&ly.
C. a disinterediation.
'. no effect on the ar&et.

1). 1#ppose that the one-year interest rate is 3.0 percent in the 7nited 1tates and /.3 percent
in ?erany9 and that the spot exchange rate is 21.1)45 and the one-year for-ard exchange
rate9 is 21.1645. Ass#e that an arbitrage#r can borro- #p to 2190009000.
A. !his is an exaple -here interest rate parity holds.
". !his is an exaple of an arbitrage opport#nityD interest rate parity does (E! hold.
C. !his is an exaple of a P#rchasing Po-er Parity %iolation and an arbitrage opport#nity.
'. (one of the abo%e

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any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
1/. 1#ppose that yo# are the treas#rer of I"> -ith an extra 712190009000 to in%est for six
onths. Fo# are considering the p#rchase of 7.1. !-bills that yield 1.C106 *thatGs a six onth
rate9 not an ann#al rate by the -ay+ and ha%e a at#rity of )6 -ee&s. !he spot exchange rate
is 21.00 H I1009 and the six onth for-ard rate is 21.00 H I110. !he interest rate in Japan *on
an in%estent of coparable ris&+ is 1/ percent. ,hat is yo#r strategy:
A. !a&e 219 in%est in 7.1. !-bills.
". !a&e 219 translate into yen at the spot9 in%est in Japan9 and repatriate yo#r yen earnings
bac& into dollars at the spot rate pre%ailing in six onths.
C. !a&e 219 translate into yen at the spot9 in%est in Japan9 hedge -ith a short position in the
for-ard contract.
'. !a&e 219 translate into yen at the for-ard rate9 in%est in Japan9 hedge -ith a short
position in the spot contract.

10. 1#ppose that the ann#al interest rate is ).0 percent in the 7nited 1tates and 0 percent in
?erany9 and that the spot exchange rate is 21.6045 and the for-ard exchange rate9 -ith one-
year at#rity9 is 21.3C45. Ass#e that an arbitrager can borro- #p to 2190009000 or 56)39000.
If an ast#te trader finds an arbitrage9 -hat is the net cash flo- in one year:
A. 2)/C.63
". 2109000
C. 2069)0<
'. 2<9000

13. A c#rrency dealer has good credit and can borro- either 2190009000 or 5C009000 for one
year. !he one-year interest rate in the 7.1. is i2 H )6 and in the e#ro 8one the one-year
interest rate is i5 H 66. !he spot exchange rate is 21.)3 H 51.00 and the one-year for-ard
exchange rate is 21.)0 H 51.00. 1ho- ho- to reali8e a certain profit %ia co%ered interest
arbitrage.
A. "orro- 2190009000 at )6. !rade 2190009000 for 5C009000D in%est at i5 H 66D translate
proceeds bac& at for-ard rate of 21.)0 H 51.009 gross proceeds H 21901<9600.
". "orro- 5C009000 at i5 H 66D translate to dollars at the spot9 in%est in the 7.1. at i2 H )6 for
one yearD translate 5C0C9000 bac& into e#ro at the for-ard rate of 21.)0 H 51.00. (et profit
2)9000.
C. "orro- 5C009000 at i5 H 66D translate to dollars at the spot9 in%est in the 7.1. at i2 H )6 for
one yearD translate 5C309000 bac& into e#ro at the for-ard rate of 21.)0 H 51.00. (et profit
5)9000.
'. "oth c+ and b+

6-0
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any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
16. 1#ppose that the ann#al interest rate is 3.0 percent in the 7nited 1tates and /.3 percent in
?erany9 and that the spot exchange rate is 21.1)45 and the for-ard exchange rate9 -ith one-
year at#rity9 is 21.1645. Ass#e that an arbitrager can borro- #p to 2190009000. If an ast#te
trader finds an arbitrage9 -hat is the net cash flo- in one year:
A. 21096;0
". 2139000
C. 2069)0<
'. 2)19;60.);

1<. A 7.1.-based c#rrency dealer has good credit and can borro- 2190009000 for one year.
!he one-year interest rate in the 7.1. is i2 H )6 and in the e#ro 8one the one-year interest rate
is i5 H 66. !he spot exchange rate is 21.)3 H 51.00 and the one-year for-ard exchange rate is
21.)0 H 51.00. 1ho- ho- to reali8e a certain dollar profit %ia co%ered interest arbitrage.
A. "orro- 2190009000 at )6. !rade 2190009000 for 5C009000D in%est at i5 H 66D translate
proceeds bac& at for-ard rate of 21.)0 H 51.009 gross proceeds H 21901<9600.
". "orro- 5C009000 at i5 H 66D translate to dollars at the spot9 in%est in the 7.1. at i2 H )6 for
one yearD translate 5C0C9000 bac& into e#ro at the for-ard rate of 21.)0 H 51.00. (et profit
2)9000.
C. "orro- 5C009000 at i5 H 66D translate to dollars at the spot9 in%est in the 7.1. at i2 H )6 for
one yearD translate 5C309000 bac& into e#ro at the for-ard rate of 21.)0 H 51.00. (et profit
5)9000.
'. "oth c+ and b+

1C. An Italian c#rrency dealer has good credit and can borro- 5C009000 for one year. !he
one-year interest rate in the 7.1. is i2 H )6 and in the e#ro 8one the one-year interest rate is i5
H 66. !he spot exchange rate is 21.)3 H 51.00 and the one-year for-ard exchange rate is
21.)0 H 51.00. 1ho- ho- to reali8e a certain e#ro-denoinated profit %ia co%ered interest
arbitrage.
A. "orro- 2190009000 at )6. !rade 2190009000 for 5C009000D in%est at i5 H 66D translate
proceeds bac& at for-ard rate of 21.)0 H 51.009 gross proceeds H 21901<9600.
". "orro- 5C009000 at i5 H 66D translate to dollars at the spot9 in%est in the 7.1. at i2 H )6 for
one yearD translate 5C0C9000 bac& into e#ro at the for-ard rate of 21.)0 H 51.00. (et profit
2)9000.
C. "orro- 5C009000 at i5 H 66D translate to dollars at the spot9 in%est in the 7.1. at i2 H )6 for
one yearD translate 5C309000 bac& into e#ro at the for-ard rate of 21.)0 H 51.00. (et profit
5)9000.
'. "oth c+ and b+

6-3
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any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
1;. 1#ppose that yo# are the treas#rer of I"> -ith an extra 712190009000 to in%est for six
onths. Fo# are considering the p#rchase of 7.1. !-bills that yield 1.C106 *thatGs a six onth
rate9 not an ann#al rate by the -ay+ and ha%e a at#rity of )6 -ee&s. !he spot exchange rate
is 21.00 H I1009 and the six onth for-ard rate is 21.00 H I110. ,hat #st the interest rate in
Japan *on an in%estent of coparable ris&+ be before yo# are -illing to consider in%esting
there for six onths:
A. 11.;;16
". 1.1)6
C. <.036
'. -<.036

)0. @o- high does the lending rate in the e#ro 8one ha%e to be before an arbitrage#r -o#ld
(E! consider borro-ing dollars9 trading for e#ro at the spot9 in%esting in the e#ro 8one and
hedging -ith a short position in the for-ard contract:



A. !he bid-as& spreads are too -ide for any profitable arbitrage -hen i5 K 0
". /.0C6
C. -).0;6
'. (one of the abo%e

)1. 1#ppose that the one-year interest rate is 3.0 percent in the 7nited 1tates and /.3 percent
in ?erany9 and the one-year for-ard exchange rate is 21.1645. ,hat #st the spot exchange
rate be:
A. 21.1<6C45
". 21.10/045
C. 21.1)45
'. (one of the abo%e

6-6
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
)). A higher 7.1. interest rate *i2 + -ill res#lt in
A. a stronger dollar.
". a lo-er spot exchange rate *expressed as foreign c#rrency per 7.1. dollar+.
C. both a+ and b+
'. none of the abo%e

)/. If the interest rate in the 7.1. is i2 H 3 percent for the next year and interest rate in the 7.B.
is iA H C percent for the next year9 #nco%ered IRP s#ggests that
A. the po#nd is expected to depreciate against the dollar by abo#t / percent.
". the po#nd is expected to appreciate against the dollar by abo#t / percent.
C. the dollar is expected to appreciate against the po#nd by abo#t / percent.
'. both a+ and c+

)0. A c#rrency dealer has good credit and can borro- either 2190009000 or 5C009000 for one
year. !he one-year interest rate in the 7.1. is i2 H )6 and in the e#ro 8one the one-year
interest rate is i5 H 66. !he one-year for-ard exchange rate is 21.)0 H 51.00D -hat #st the
spot rate be to eliinate arbitrage opport#nities:
A. 21.)0<1 H 51.00
". 21.)0 H 51.00
C. 21.130< H 51.00
'. none of the abo%e

)3. ,ill an arbitrage#r facing the follo-ing prices be able to a&e oney:

A. Fes9 borro- 219000 at 36D !rade for 5 at the as& spot rate 21.01 H 51.00D In%est 5;;0.10 at
3.36D @edge this -ith a for-ard contract on 519000.33 at 20.;; H 51.00D Recei%e 21.0/0.11.
". Fes9 borro- 519000 at 66D !rade for 2 at the bid spot rate 21.00 H 51.00D In%est 219000 at
0.36D @edge this -ith a for-ard contract on 519003 at 21.00 H 51.00.
C. (oD the transactions costs are too high.
'. (one of the abo%e

6-<
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any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
)6. If IRP fails to hold
A. press#re fro arbitrage#rs sho#ld bring exchange rates and interest rates bac& into line.
". it ay fail to hold d#e to transactions costs.
C. it ay be d#e to go%ernent-iposed capital controls.
'. all of the abo%e

)<. Altho#gh IRP tends to hold9 it ay not hold precisely all the tie
A. d#e to transactions costs9 li&e the bid as& spread.
". d#e to asyetric inforation.
C. d#e to capital controls iposed by go%ernents.
'. both a+ and c+

)C. Consider a ban& dealer -ho faces the follo-ing spot rates and interest rates. ,hat sho#ld
he set his 1-year for-ard as& price at:



A. 21.0/)045
". 21.0/3C45
C. 21.066)45
'. 21.06<645

6-C
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
);. Consider a ban& dealer -ho faces the follo-ing spot rates and interest rates. ,hat sho#ld
he set his 1-year for-ard bid price at:



A. 21.0/)045
". 21.0/3C45
C. 21.066)45
'. 21.06<645

/0. ,ill an arbitrage#r facing the follo-ing prices be able to a&e oney:



A. Fes9 borro- 5190009000 at /.636D !rade for 2 at the bid spot rate 21.00 H 51.00D In%est at
0.16D @edge this -ith a long position in a for-ard contract.
". Fes9 borro- 2190009000 at 0.)6D !rade for 5 at the spot as& exchange rate 21.0/ H 51.00D
In%est 56;;9/00.<0 at /.36D @edge this by going 1@ER! in for-ard *agree to sell 5 L "I'
price of 21.0045 in one year+. Cash flo- in 1 year 2)/<.<6.
C. (oD the transactions costs are too high.
'. (one of the abo%e

/1. If a foreign co#nty experiences a hyperinflation9
A. its c#rrency -ill depreciate against stable c#rrencies.
". its c#rrency ay appreciate against stable c#rrencies.
C. its c#rrency ay be #naffectedMitGs diffic#lt to say.
'. none of the abo%e

6-;
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any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
/). As of today9 the spot exchange rate is 51.00 H 21.)3 and the rates of inflation expected to
pre%ail for the next year in the 7.1. is )6 and /6 in the e#ro 8one. ,hat is the one-year
for-ard rate that sho#ld pre%ail:
A. 51.00 H 21.)/<;
". 51.00 H 21.)6)/
C. 51.00 H 20.;;0/
'. 21.00 H 51.)6)/

//. P#rchasing Po-er Parity *PPP+ theory states that
A. the exchange rate bet-een c#rrencies of t-o co#ntries sho#ld be e$#al to the ratio of the
co#ntriesG price le%els.
". as the p#rchasing po-er of a c#rrency sharply declines *d#e to hyperinflation+ that
c#rrency -ill depreciate against stable c#rrencies.
C. the prices of standard coodity bas&ets in t-o co#ntries are not related.
'. both a+ and b+

/0. As of today9 the spot exchange rate is 51.00 H 21.60 and the rates of inflation expected to
pre%ail for the next year in the 7.1. is )6 and /6 in the e#ro 8one. ,hat is the one-year
for-ard rate that sho#ld pre%ail:
A. 51.00 H 21.613<
". 51.613< H 21.00
C. 51.00 H 21.3C03
'. 21.00 1.0/ H 51.60 1.0)

/3. If the ann#al inflation rate is 3.3 percent in the 7nited 1tates and 0 percent in the 7.B.9
and the dollar depreciated against the po#nd by / percent9 then the real exchange rate9
ass#ing that PPP initially held9 is
A. 0.0<
". 0.;C0;
C. -0.01;C
'. 0.3

6-10
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any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
/6. If the ann#al inflation rate is ).3 percent in the 7nited 1tates and 0 percent in the 7.B.9
and the dollar appreciated against the po#nd by 1.3 percent9 then the real exchange rate9
ass#ing that PPP initially held9 is NNNNN.
A. parity
". 0.;<10
C. -0.01;C
'. 0.3

/<. In %ie- of the fact that PPP is the anifestation of the la- of one price applied to a
standard coodity bas&et9
A. it -ill hold only if the prices of the constit#ent coodities are e$#ali8ed across co#ntries
in a gi%en c#rrency.
". it -ill hold only if the coposition of the cons#ption bas&et is the sae across co#ntries.
C. both a+ and b+
'. none of the abo%e

/C. 1oe coodities ne%er enter into international trade. Exaples incl#de
A. nontradables.
". hairc#ts.
C. ho#sing.
'. all of the abo%e

/;. ?enerally #nfa%orable e%idence on PPP s#ggests that
A. s#bstantial barriers to international coodity arbitrage exist.
". tariffs and $#otas iposed on international trade can explain at least soe of the e%idence.
C. shipping costs can a&e it diffic#lt to directly copare coodity prices.
'. all of the abo%e

00. !he price of a >c'onaldGs "ig >ac sand-ich
A. is abo#t the sae in the 1)0 co#ntries that >c'onalds does b#siness in.
". %aries considerably across the -orld in dollar ters.
C. s#pports PPP.
'. none of the abo%e.

6-11
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any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
01. !he Fisher effect can be -ritten for the 7nited 1tates asO
A.
".
C.
'.

0). For-ard parity states that
A. any for-ard prei# or disco#nt is e$#al to the expected change in the exchange rate.
". any for-ard prei# or disco#nt is e$#al to the act#al change in the exchange rate.
C. the noinal interest rate differential reflects the expected change in the exchange rate.
'. an increase *decrease+ in the expected inflation rate in a co#ntry -ill ca#se a proportionate
increase *decrease+ in the interest rate in the co#ntry.

0/. !he International Fisher Effect s#ggests that
A. any for-ard prei# or disco#nt is e$#al to the expected change in the exchange rate.
". any for-ard prei# or disco#nt is e$#al to the act#al change in the exchange rate
C. the noinal interest rate differential reflects the expected change in the exchange rate.
'. an increase *decrease+ in the expected inflation rate in a co#ntry -ill ca#se a proportionate
increase *decrease+ in the interest rate in the co#ntry.

00. !he Fisher effect states that
A. any for-ard prei# or disco#nt is e$#al to the expected change in the exchange rate.
". any for-ard prei# or disco#nt is e$#al to the act#al change in the exchange rate.
C. the noinal interest rate differential reflects the expected change in the exchange rate.
'. an increase *decrease+ in the expected inflation rate in a co#ntry -ill ca#se a proportionate
increase *decrease+ in the interest rate in the co#ntry.

6-1)
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
03. If yo# co#ld acc#rately and consistently forecast exchange rates
A. this -o#ld be a %ery handy thing as girls prefer g#ys -ith s&ills.
". yo# co#ld ipress yo#r dates.
C. yo# co#ld a&e a great deal of oney.
'. all of the abo%e

06. !he ain approaches to forecasting exchange rates are
A. Efficient ar&et9 F#ndaental9 and !echnical approaches.
". Efficient ar&et and !echnical approaches.
C. Efficient ar&et and F#ndaental approaches.
'. F#ndaental and !echnical approaches.

0<. !he benefit to forecasting exchange rates
A. are greatest d#ring periods of fixed exchange rates.
". are nonexistent no- that the e#ro and dollar are the biggest gae in to-n.
C. accr#e to9 and are a %ital concern for9 >(Cs for#lating international so#rcing9
prod#ction9 financing and ar&eting strategies.
'. all of the abo%e

0C. !he Efficient >ar&ets @ypothesis states
A. ar&ets tend to e%ol%e to lo- transactions costs and speedy exec#tion of orders.
". c#rrent asset prices *e.g. exchange rates+ f#lly reflect all the a%ailable and rele%ant
inforation.
C. c#rrent exchange rates cannot be explained by s#ch f#ndaental forces as oney s#pplies9
inflation rates and so forth.
'. none of the abo%e

0;. ?ood9 inexpensi%e9 and fairly reliable predictors of f#t#re exchange rates incl#de
A. todayGs exchange rate.
". c#rrent for-ard exchange rates *e.g. the six-onth for-ard rate is a pretty good predictor
of the spot rate that -ill pre%ail six onths fro today+.
C. esoteric f#ndaental odels that ta&e an econoetrician to #se and no one can explain.
'. both a+ and b+

6-1/
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
30. ,hich of the follo-ing is a tr#e stateent:
A. ,hile researchers fo#nd it diffic#lt to re.ect the rando -al& hypothesis for exchange
rates on epirical gro#nds9 there is no theoretical reason -hy exchange rates sho#ld follo- a
p#re rando -al&.
". ,hile researchers fo#nd it easy to re.ect the rando -al& hypothesis for exchange rates on
epirical gro#nds9 there are strong theoretical reasons -hy exchange rates sho#ld follo- a
p#re rando -al&.
C. ,hile researchers fo#nd it diffic#lt to re.ect the rando -al& hypothesis for exchange rates
on epirical gro#nds9 there are copelling theoretical reasons -hy exchange rates sho#ld
follo- a p#re rando -al&.
'. (one of the abo%e

31. If the exchange rate follo-s a random walk
A. the f#t#re exchange rate is #npredictable.
". the f#t#re exchange rate is expected to be the sae as the c#rrent exchange rate9 St H
E*StP1+.
C. the best predictor of f#t#re exchange rates is the for-ard rate Ft H E*StP1QIt+.
'. both b+ and c+

3). Ene iplication of the rando -al& hypothesis is
A. gi%en the efficiency of foreign exchange ar&ets9 it is diffic#lt to o#tperfor the ar&et-
based forecasts #nless the forecaster has access to pri%ate inforation that is not yet reflected
in the c#rrent exchange rate.
". gi%en the efficiency of foreign exchange ar&ets9 it is diffic#lt to o#tperfor the ar&et-
based forecasts #nless the forecaster has access to pri%ate inforation that is already reflected
in the c#rrent exchange rate.
C. gi%en the relati%e inefficiency of foreign exchange ar&ets9 it is diffic#lt to o#tperfor the
technical forecasts #nless the forecaster has access to pri%ate inforation that is not yet
reflected in the c#rrent f#t#res exchange rate.
'. none of the abo%e

3/. !he rando -al& hypothesis s#ggests that
A. the best predictor of the f#t#re exchange rate is the c#rrent exchange rate.
". the best predictor of the f#t#re exchange rate is the c#rrent for-ard rate.
C. both a+ and b+ are consistent -ith the efficient ar&et hypothesis.
'. (one of the abo%e

6-10
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
30. ,ith regard to f#ndaental forecasting %ers#s technical forecasting of exchange rates
A. the technicians tend to #se Rca#se and effectR odels.
". the f#ndaentalists tend to belie%e that Rhistory -ill repeat itselfR is the best odel.
C. both a+ and b+
'. none of the abo%e

33. ?enerating exchange rate forecasts -ith the f#ndaental approach in%ol%es
A. loo&ing at charts of the exchange rate and extrapolating the patterns into the f#t#re
". estiation of a structural model
C. s#bstit#ting the estiated %al#es of the independent %ariables into the estiated str#ct#ral
odel to generate the forecast
'. both b+ and c+

36. ,hich of the follo-ing iss#es are diffic#lties for the f#ndaental approach to exchange
rate forecasting:
A. Ene has to forecast a set of independent %ariables to forecast the exchange rates.
Forecasting the forer -ill certainly be s#b.ect to errors and ay not be necessarily easier
than forecasting the latter.
". !he paraeter %al#es9 that is the Gs and Gs9 that are estiated #sing historical data ay
change o%er tie beca#se of changes in go%ernent policies and4or the #nderlying str#ct#re
of the econoy. Either diffic#lty can diinish the acc#racy of forecasts e%en if the odel is
correct.
C. !he odel itself can be -rong.
'. All of the abo%e

3<. Researchers ha%e fo#nd that the f#ndaental approach to exchange rate forecasting
A. o#tperfors the efficient ar&et approach.
". fails to ore acc#rately forecast exchange rates than either the rando -al& odel or the
for-ard rate odel.
C. fails to ore acc#rately forecast exchange rates than the rando -al& odel b#t is better
than the for-ard rate odel.
'. o#tperfors the rando -al& odel9 b#t fails to ore acc#rately forecast exchange rates
than the for-ard rate odel.

6-13
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
3C. Acadeic st#dies tend to discredit the %alidity of technical analysis. ,hich of the
follo-ing is tr#e:
A. !his can be %ie-ed as s#pport technical analysis.
". It can be rational for indi%id#al traders to #se technical analysisMif eno#gh traders #se
technical analysis the predictions based on it can becoe self-f#lfilling to soe extent9 at least
in the short-r#n.
C. !hat can be explained by the diffic#lty professors ay ha%e in differentiating bet-een
technical analysis and f#ndaental analysis.
'. (one of the abo%e

3;. !he o%ing a%erage crosso%er r#le
A. is a f#ndaental approach to forecasting exchange rates.
". states that a crosso%er of the short-ter o%ing a%erage abo%e the long-ter o%ing
a%erage signals that the foreign c#rrency is appreciating.
C. states that a crosso%er of the short-ter o%ing a%erage abo%e the long-ter o%ing
a%erage signals that the foreign c#rrency is depreciating.
'. none of the abo%e

60. According to the technical approach9 -hat atters in exchange rate deterination is
A. the past beha%ior of exchange rates.
". the %elocity of oney.
C. the f#t#re beha%ior of exchange rates.
'. the beta.

61. 1t#dies of the acc#racy of paid exchange rate forecasters
A. tend to s#pport the %ie- that Ryo# get -hat yo# pay forR.
". tend to s#pport the %ie- that forecasting is easy9 at least -ith regard to a.or c#rrencies
li&e the e#ro and Japanese yen.
C. tend to s#pport the %ie- that ban&s do their best forecasting -ith the yen.
'. none of the abo%e

6-16
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
6). According to the research in the acc#racy of paid exchange rate forecasters9
A. as a gro#p9 they do not do a better .ob of forecasting the exchange rate than the for-ard
rate does.
". the a%erage forecaster is better than a%erage at forecasting.
C. the forecasters do a better .ob of predicting the f#t#re exchange rate than the ar&et does.
'. none of the abo%e

6/. According to the research in the acc#racy of paid exchange rate forecasters9
A. yo# can a&e ore oney selling forecasts than yo# can follo-ing forecasts.
". the a%erage forecaster is better than a%erage at forecasting.
C. the forecasters do a better .ob of predicting the f#t#re exchange rates than the ar&et does.
'. none of the abo%e.

60. According to the onetary approach9 -hat atters in exchange rate deterination are
A. the relati%e oney s#pplies.
". the relati%e %elocities of onies.
C. the relati%e national o#tp#ts.
'. all of the abo%e

63. According to the onetary approach9 the exchange rate can be expressed as
A.
".
C.
'. none of the abo%e


Short Answer Questions

6-1<
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates

Please note that yo#r ans-ers are -orth 8ero points if they do not incl#de c#rrency sybols
*29 5+

66. If yo# borro-ed 5190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:




6<. If yo# borro-ed 2190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:




6C. If yo# had borro-ed 2190009000 and traded for e#ro at the spot rate9 ho- any 5 do yo#
recei%e:




6-1C
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
6;. If yo# had 5190009000 and traded it for 71' at the spot rate9 ho- any 71' -ill yo#
get:




<0. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
exchange rate in 2 per 5 that satisfies IRP fro the perspecti%e of a c#stoer that borro-ed
21 traded for 5 at the spot and in%ested at i5 H 06.




<1. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
exchange rate in 2 per 5 that that satisfies IRP fro the perspecti%e of a c#stoer -ho
borro-ed 519 traded for dollars at the spot rate and in%ested at i2 H )6.




<). !here is *at least+ one profitable arbitrage at these prices. ,hat is it:




6-1;
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates

Please note that yo#r ans-ers are -orth 8ero points if they do not incl#de c#rrency sybols
*29 5+

</. If yo# borro-ed 5190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:




<0. If yo# borro-ed 2190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:




<3. If yo# had borro-ed 2190009000 and traded for e#ro at the spot rate9 ho- any 5 do yo#
recei%e:




6-)0
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
<6. If yo# had 5190009000 and traded it for 71' at the spot rate9 ho- any 71' -ill yo#
get:




<<. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
exchange rate in 2 per 5 that satisfies IRP fro the perspecti%e of a c#stoer that borro-ed
21 traded for 5 at the spot and in%ested at i5 H /6.




<C. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
exchange rate in 2 per 5 that that satisfies IRP fro the perspecti%e of a c#stoer -ho
borro-ed 519 traded for dollars at the spot rate and in%ested at i2 H 06.




<;. !here is *at least+ one profitable arbitrage at these prices. ,hat is it:




6-)1
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
Ass#e that yo# are a retail c#stoer *i.e. yo# b#y at the as& and sell at the bid+.

Please note that yo#r ans-ers are -orth 8ero points if they do not incl#de c#rrency sybols
*29 5+

C0. If yo# borro-ed 5190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:




C1. If yo# borro-ed 2190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:




C). If yo# had borro-ed 2190009000 and traded for e#ro at the spot rate9 ho- any 5 do yo#
recei%e:




6-))
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
C/. If yo# had 5190009000 and traded it for 71' at the spot rate9 ho- any 71' -ill yo#
get:




C0. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
I! exchange rate in 2 per 5 that satisfies IRP fro the perspecti%e of a c#stoer.




C3. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
A1B exchange rate in 2 per 5 that that satisfies IRP fro the perspecti%e of a c#stoer.




C6. !here is *at least+ one profitable arbitrage at these prices. ,hat is it:




6-)/
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
Ass#e that yo# are a retail c#stoer


Please note that yo#r ans-ers are -orth 8ero points if they do not incl#de c#rrency sybols
*29 5+

C<. If yo# borro-ed 5190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:




CC. If yo# borro-ed 2190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:




C;. If yo# had borro-ed 2190009000 and traded for e#ro at the spot rate9 ho- any 5 do yo#
recei%e:




6-)0
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
;0. If yo# had 5190009000 and traded it for 71' at the spot rate9 ho- any 71' -ill yo#
get:




;1. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
I! exchange rate in 2 per 5 that that satisfies IRP fro the perspecti%e of a c#stoer.




;). 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
AS" exchange rate in 2 per 5 that that satisfies IRP fro the perspecti%e of a c#stoer.




;/. !here is *at least+ one profitable arbitrage at these prices. ,hat is it:




6-)3
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
Ass#e that yo# are a retail c#stoer


Please note that yo#r ans-ers are -orth 8ero points if they do not incl#de c#rrency sybols
*29 5+

;0. If yo# borro-ed 5190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:




;3. If yo# borro-ed 2190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:




;6. If yo# had borro-ed 2190009000 and traded for e#ro at the spot rate9 ho- any 5 do yo#
recei%e:




6-)6
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
;<. If yo# had 5190009000 and traded it for 71' at the spot rate9 ho- any 71' -ill yo#
get:




;C. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
I! exchange rate in 2 per 5 that that satisfies IRP fro the perspecti%e of a c#stoer.




;;. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
AS" exchange rate in 2 per 5 that that satisfies IRP fro the perspecti%e of a c#stoer.




100. !here is *at least+ one *sallish+ profitable arbitrage at these prices. ,hat is it:




6-)<
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
Chapter 06 International Parity Relationships and Forecasting Foreign Exchange
Rates Ans-er Bey


Multiple Choice Questions

1. An arbitrage is best defined as
A. A legal condition iposed by the CF!C.
". !he act of si#ltaneo#sly b#ying and selling the sae or e$#i%alent assets or coodities
for the p#rpose of a&ing reasonable profits.
C# !he act of si#ltaneo#sly b#ying and selling the sae or e$#i%alent assets or coodities
for the p#rpose of a&ing g#aranteed profits.
'. (one of the abo%e

). Interest Rate Parity *IRP+ is best defined as
A. ,hen a go%ernent brings its doestic interest rate in line -ith other a.or financial
ar&ets.
". ,hen the central ban& of a co#ntry brings its doestic interest rate in line -ith its a.or
trading partners.
C# An arbitrage condition that #st hold -hen international financial ar&ets are in
e$#ilibri#.
'. (one of the abo%e

Topic: Interest Rate Parity

/. ,hen Interest Rate Parity *IRP+ does not hold
A. there is #s#ally a high degree of inflation in at least one co#ntry.
". the financial ar&ets are in e$#ilibri#.
C# there are opport#nities for co%ered interest arbitrage.
'. both b+ and c+

Topic: Interest Rate Parity

6-)C
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
0. 1#ppose yo# obser%e a spot exchange rate of 21.3045. If interest rates are 36 APR in the
7.1. and /6 APR in the e#ro 8one9 -hat is the no-arbitrage 1-year for-ard rate:
A. 51.3);142
# 21.3);145
C. 51.0<1042
'. 21.0<1045

Topic: Interest Rate Parity

3. 1#ppose yo# obser%e a spot exchange rate of 21.3045. If interest rates are /6 APR in the
7.1. and 36 APR in the e#ro 8one9 -hat is the no-arbitrage 1-year for-ard rate:
A. 51.3);142
". 21.3);145
C. 51.0<1042
!# 21.0<1045

Topic: Interest Rate Parity

6. 1#ppose yo# obser%e a spot exchange rate of 2).004A. If interest rates are 36 APR in the
7.1. and )6 APR in the 7.B.9 -hat is the no-arbitrage 1-year for-ard rate:
A. A).03CC42
# 2).03CC4A
C. A1.;0);42
'. 21.;0);4A

Topic: Interest Rate Parity

6-);
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
<. A foral stateent of IRP is
A#
".
C.
'.

Topic: Interest Rate Parity

C. 1#ppose that the one-year interest rate is 3.0 percent in the 7nited 1tatesD the spot exchange
rate is 21.)045D and the one-year for-ard exchange rate is 21.1645. ,hat #st one-year
interest rate be in the e#ro 8one to a%oid arbitrage:
A. 3.06
". 6.0;6
C# C.6)6
'. (one of the abo%e

Topic: Covered Interest Arbitrage

;. 1#ppose that the one-year interest rate is /.0 percent in the Italy9 the spot exchange rate is
21.)0459 and the one-year for-ard exchange rate is 21.1C45. ,hat #st one-year interest rate
be in the 7nited 1tates:
A# 1.)C//6
". 1.01)C6
C. 0.<36
'. (one of the abo%e

Topic: Covered Interest Arbitrage

6-/0
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
10. 1#ppose that the one-year interest rate is 0.0 percent in the Italy9 the spot exchange rate is
21.60459 and the one-year for-ard exchange rate is 21.3C45. ,hat #st one-year interest rate
be in the 7nited 1tates:
A. )6
# ).<6
C. 3./)6
'. (one of the abo%e

Topic: Covered Interest Arbitrage

11. Co%ered Interest Arbitrage *CIA+ acti%ities -ill res#lt in
A. an #nstable international financial ar&ets.
# restoring e$#ilibri# $#ite $#ic&ly.
C. a disinterediation.
'. no effect on the ar&et.

Topic: Covered Interest Arbitrage

1). 1#ppose that the one-year interest rate is 3.0 percent in the 7nited 1tates and /.3 percent
in ?erany9 and that the spot exchange rate is 21.1)45 and the one-year for-ard exchange
rate9 is 21.1645. Ass#e that an arbitrage#r can borro- #p to 2190009000.
A. !his is an exaple -here interest rate parity holds.
# !his is an exaple of an arbitrage opport#nityD interest rate parity does (E! hold.
C. !his is an exaple of a P#rchasing Po-er Parity %iolation and an arbitrage opport#nity.
'. (one of the abo%e

Topic: Covered Interest Arbitrage

6-/1
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
1/. 1#ppose that yo# are the treas#rer of I"> -ith an extra 712190009000 to in%est for six
onths. Fo# are considering the p#rchase of 7.1. !-bills that yield 1.C106 *thatGs a six onth
rate9 not an ann#al rate by the -ay+ and ha%e a at#rity of )6 -ee&s. !he spot exchange rate
is 21.00 H I1009 and the six onth for-ard rate is 21.00 H I110. !he interest rate in Japan *on
an in%estent of coparable ris&+ is 1/ percent. ,hat is yo#r strategy:
A. !a&e 219 in%est in 7.1. !-bills.
". !a&e 219 translate into yen at the spot9 in%est in Japan9 and repatriate yo#r yen earnings
bac& into dollars at the spot rate pre%ailing in six onths.
C# !a&e 219 translate into yen at the spot9 in%est in Japan9 hedge -ith a short position in the
for-ard contract.
'. !a&e 219 translate into yen at the for-ard rate9 in%est in Japan9 hedge -ith a short
position in the spot contract.

Topic: Covered Interest Arbitrage

10. 1#ppose that the ann#al interest rate is ).0 percent in the 7nited 1tates and 0 percent in
?erany9 and that the spot exchange rate is 21.6045 and the for-ard exchange rate9 -ith one-
year at#rity9 is 21.3C45. Ass#e that an arbitrager can borro- #p to 2190009000 or 56)39000.
If an ast#te trader finds an arbitrage9 -hat is the net cash flo- in one year:
A. 2)/C.63
". 2109000
C. 2069)0<
!# 2<9000

Topic: Covered Interest Arbitrage

6-/)
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
13. A c#rrency dealer has good credit and can borro- either 2190009000 or 5C009000 for one
year. !he one-year interest rate in the 7.1. is i2 H )6 and in the e#ro 8one the one-year
interest rate is i5 H 66. !he spot exchange rate is 21.)3 H 51.00 and the one-year for-ard
exchange rate is 21.)0 H 51.00. 1ho- ho- to reali8e a certain profit %ia co%ered interest
arbitrage.
A. "orro- 2190009000 at )6. !rade 2190009000 for 5C009000D in%est at i5 H 66D translate
proceeds bac& at for-ard rate of 21.)0 H 51.009 gross proceeds H 21901<9600.
". "orro- 5C009000 at i5 H 66D translate to dollars at the spot9 in%est in the 7.1. at i2 H )6 for
one yearD translate 5C0C9000 bac& into e#ro at the for-ard rate of 21.)0 H 51.00. (et profit
2)9000.
C. "orro- 5C009000 at i5 H 66D translate to dollars at the spot9 in%est in the 7.1. at i2 H )6 for
one yearD translate 5C309000 bac& into e#ro at the for-ard rate of 21.)0 H 51.00. (et profit
5)9000.
!# "oth c+ and b+

Topic: Covered Interest Arbitrage

16. 1#ppose that the ann#al interest rate is 3.0 percent in the 7nited 1tates and /.3 percent in
?erany9 and that the spot exchange rate is 21.1)45 and the for-ard exchange rate9 -ith one-
year at#rity9 is 21.1645. Ass#e that an arbitrager can borro- #p to 2190009000. If an ast#te
trader finds an arbitrage9 -hat is the net cash flo- in one year:
A. 21096;0
". 2139000
C. 2069)0<
!# 2)19;60.);

Topic: Covered Interest Arbitrage

6-//
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
1<. A 7.1.-based c#rrency dealer has good credit and can borro- 2190009000 for one year.
!he one-year interest rate in the 7.1. is i2 H )6 and in the e#ro 8one the one-year interest rate
is i5 H 66. !he spot exchange rate is 21.)3 H 51.00 and the one-year for-ard exchange rate is
21.)0 H 51.00. 1ho- ho- to reali8e a certain dollar profit %ia co%ered interest arbitrage.
A. "orro- 2190009000 at )6. !rade 2190009000 for 5C009000D in%est at i5 H 66D translate
proceeds bac& at for-ard rate of 21.)0 H 51.009 gross proceeds H 21901<9600.
# "orro- 5C009000 at i5 H 66D translate to dollars at the spot9 in%est in the 7.1. at i2 H )6 for
one yearD translate 5C0C9000 bac& into e#ro at the for-ard rate of 21.)0 H 51.00. (et profit
2)9000.
C. "orro- 5C009000 at i5 H 66D translate to dollars at the spot9 in%est in the 7.1. at i2 H )6 for
one yearD translate 5C309000 bac& into e#ro at the for-ard rate of 21.)0 H 51.00. (et profit
5)9000.
'. "oth c+ and b+

Topic: Covered Interest Arbitrage

1C. An Italian c#rrency dealer has good credit and can borro- 5C009000 for one year. !he
one-year interest rate in the 7.1. is i2 H )6 and in the e#ro 8one the one-year interest rate is i5
H 66. !he spot exchange rate is 21.)3 H 51.00 and the one-year for-ard exchange rate is
21.)0 H 51.00. 1ho- ho- to reali8e a certain e#ro-denoinated profit %ia co%ered interest
arbitrage.
A. "orro- 2190009000 at )6. !rade 2190009000 for 5C009000D in%est at i5 H 66D translate
proceeds bac& at for-ard rate of 21.)0 H 51.009 gross proceeds H 21901<9600.
". "orro- 5C009000 at i5 H 66D translate to dollars at the spot9 in%est in the 7.1. at i2 H )6 for
one yearD translate 5C0C9000 bac& into e#ro at the for-ard rate of 21.)0 H 51.00. (et profit
2)9000.
C# "orro- 5C009000 at i5 H 66D translate to dollars at the spot9 in%est in the 7.1. at i2 H )6 for
one yearD translate 5C309000 bac& into e#ro at the for-ard rate of 21.)0 H 51.00. (et profit
5)9000.
'. "oth c+ and b+

Topic: Covered Interest Arbitrage

6-/0
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
1;. 1#ppose that yo# are the treas#rer of I"> -ith an extra 712190009000 to in%est for six
onths. Fo# are considering the p#rchase of 7.1. !-bills that yield 1.C106 *thatGs a six onth
rate9 not an ann#al rate by the -ay+ and ha%e a at#rity of )6 -ee&s. !he spot exchange rate
is 21.00 H I1009 and the six onth for-ard rate is 21.00 H I110. ,hat #st the interest rate in
Japan *on an in%estent of coparable ris&+ be before yo# are -illing to consider in%esting
there for six onths:
A# 11.;;16
". 1.1)6
C. <.036
'. -<.036

Topic: Covered Interest Arbitrage

)0. @o- high does the lending rate in the e#ro 8one ha%e to be before an arbitrage#r -o#ld
(E! consider borro-ing dollars9 trading for e#ro at the spot9 in%esting in the e#ro 8one and
hedging -ith a short position in the for-ard contract:



A. !he bid-as& spreads are too -ide for any profitable arbitrage -hen i5 K 0
# /.0C6
C. -).0;6
'. (one of the abo%e

Topic: Covered Interest Arbitrage

6-/3
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
)1. 1#ppose that the one-year interest rate is 3.0 percent in the 7nited 1tates and /.3 percent
in ?erany9 and the one-year for-ard exchange rate is 21.1645. ,hat #st the spot exchange
rate be:
A. 21.1<6C45
# 21.10/045
C. 21.1)45
'. (one of the abo%e

Topic: Interest Rate Parity and Ec!ange Rate "etermination

)). A higher 7.1. interest rate *i2 + -ill res#lt in
A# a stronger dollar.
". a lo-er spot exchange rate *expressed as foreign c#rrency per 7.1. dollar+.
C. both a+ and b+
'. none of the abo%e

Topic: Interest Rate Parity and Ec!ange Rate "etermination

)/. If the interest rate in the 7.1. is i2 H 3 percent for the next year and interest rate in the 7.B.
is iA H C percent for the next year9 #nco%ered IRP s#ggests that
A. the po#nd is expected to depreciate against the dollar by abo#t / percent.
". the po#nd is expected to appreciate against the dollar by abo#t / percent.
C. the dollar is expected to appreciate against the po#nd by abo#t / percent.
!# both a+ and c+

Topic: Interest Rate Parity and Ec!ange Rate "etermination

6-/6
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
)0. A c#rrency dealer has good credit and can borro- either 2190009000 or 5C009000 for one
year. !he one-year interest rate in the 7.1. is i2 H )6 and in the e#ro 8one the one-year
interest rate is i5 H 66. !he one-year for-ard exchange rate is 21.)0 H 51.00D -hat #st the
spot rate be to eliinate arbitrage opport#nities:
A# 21.)0<1 H 51.00
". 21.)0 H 51.00
C. 21.130< H 51.00
'. none of the abo%e

Topic: Interest Rate Parity and Ec!ange Rate "etermination

)3. ,ill an arbitrage#r facing the follo-ing prices be able to a&e oney:

A. Fes9 borro- 219000 at 36D !rade for 5 at the as& spot rate 21.01 H 51.00D In%est 5;;0.10 at
3.36D @edge this -ith a for-ard contract on 519000.33 at 20.;; H 51.00D Recei%e 21.0/0.11.
". Fes9 borro- 519000 at 66D !rade for 2 at the bid spot rate 21.00 H 51.00D In%est 219000 at
0.36D @edge this -ith a for-ard contract on 519003 at 21.00 H 51.00.
C# (oD the transactions costs are too high.
'. (one of the abo%e

Topic: Reasons #or "eviations #rom Interest Rate Parity

)6. If IRP fails to hold
A. press#re fro arbitrage#rs sho#ld bring exchange rates and interest rates bac& into line.
". it ay fail to hold d#e to transactions costs.
C. it ay be d#e to go%ernent-iposed capital controls.
!# all of the abo%e

Topic: Reasons #or "eviations #rom Interest Rate Parity

6-/<
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
)<. Altho#gh IRP tends to hold9 it ay not hold precisely all the tie
A. d#e to transactions costs9 li&e the bid as& spread.
". d#e to asyetric inforation.
C. d#e to capital controls iposed by go%ernents.
!# both a+ and c+

Topic: Reasons #or "eviations #rom Interest Rate Parity

)C. Consider a ban& dealer -ho faces the follo-ing spot rates and interest rates. ,hat sho#ld
he set his 1-year for-ard as& price at:



A. 21.0/)045
". 21.0/3C45
C# 21.066)45
'. 21.06<645

Topic: Reasons #or "eviations #rom Interest Rate Parity

6-/C
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
);. Consider a ban& dealer -ho faces the follo-ing spot rates and interest rates. ,hat sho#ld
he set his 1-year for-ard bid price at:



A. 21.0/)045
# 21.0/3C45
C. 21.066)45
'. 21.06<645

Topic: Reasons #or "eviations #rom Interest Rate Parity

/0. ,ill an arbitrage#r facing the follo-ing prices be able to a&e oney:



A. Fes9 borro- 5190009000 at /.636D !rade for 2 at the bid spot rate 21.00 H 51.00D In%est at
0.16D @edge this -ith a long position in a for-ard contract.
# Fes9 borro- 2190009000 at 0.)6D !rade for 5 at the spot as& exchange rate 21.0/ H 51.00D
In%est 56;;9/00.<0 at /.36D @edge this by going 1@ER! in for-ard *agree to sell 5 L "I'
price of 21.0045 in one year+. Cash flo- in 1 year 2)/<.<6.
C. (oD the transactions costs are too high.
'. (one of the abo%e

Topic: Reasons #or "eviations #rom Interest Rate Parity

6-/;
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
/1. If a foreign co#nty experiences a hyperinflation9
A# its c#rrency -ill depreciate against stable c#rrencies.
". its c#rrency ay appreciate against stable c#rrencies.
C. its c#rrency ay be #naffectedMitGs diffic#lt to say.
'. none of the abo%e

Topic: Purc!asing Power Parity

/). As of today9 the spot exchange rate is 51.00 H 21.)3 and the rates of inflation expected to
pre%ail for the next year in the 7.1. is )6 and /6 in the e#ro 8one. ,hat is the one-year
for-ard rate that sho#ld pre%ail:
A# 51.00 H 21.)/<;
". 51.00 H 21.)6)/
C. 51.00 H 20.;;0/
'. 21.00 H 51.)6)/

Topic: Purc!asing Power Parity

//. P#rchasing Po-er Parity *PPP+ theory states that
A. the exchange rate bet-een c#rrencies of t-o co#ntries sho#ld be e$#al to the ratio of the
co#ntriesG price le%els.
". as the p#rchasing po-er of a c#rrency sharply declines *d#e to hyperinflation+ that
c#rrency -ill depreciate against stable c#rrencies.
C. the prices of standard coodity bas&ets in t-o co#ntries are not related.
!# both a+ and b+

Topic: Purc!asing Power Parity

6-00
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
/0. As of today9 the spot exchange rate is 51.00 H 21.60 and the rates of inflation expected to
pre%ail for the next year in the 7.1. is )6 and /6 in the e#ro 8one. ,hat is the one-year
for-ard rate that sho#ld pre%ail:
A. 51.00 H 21.613<
". 51.613< H 21.00
C# 51.00 H 21.3C03
'. 21.00 1.0/ H 51.60 1.0)

Topic: Purc!asing Power Parity

/3. If the ann#al inflation rate is 3.3 percent in the 7nited 1tates and 0 percent in the 7.B.9
and the dollar depreciated against the po#nd by / percent9 then the real exchange rate9
ass#ing that PPP initially held9 is
A. 0.0<
# 0.;C0;
C. -0.01;C
'. 0.3

Topic: PPP "eviations and t!e Real Ec!ange Rate

/6. If the ann#al inflation rate is ).3 percent in the 7nited 1tates and 0 percent in the 7.B.9
and the dollar appreciated against the po#nd by 1.3 percent9 then the real exchange rate9
ass#ing that PPP initially held9 is NNNNN.
A. parity
# 0.;<10
C. -0.01;C
'. 0.3

Topic: PPP "eviations and t!e Real Ec!ange Rate

6-01
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
/<. In %ie- of the fact that PPP is the anifestation of the la- of one price applied to a
standard coodity bas&et9
A. it -ill hold only if the prices of the constit#ent coodities are e$#ali8ed across co#ntries
in a gi%en c#rrency.
". it -ill hold only if the coposition of the cons#ption bas&et is the sae across co#ntries.
C# both a+ and b+
'. none of the abo%e

Topic: Evidence on Purc!asing Power Parity

/C. 1oe coodities ne%er enter into international trade. Exaples incl#de
A. nontradables.
". hairc#ts.
C. ho#sing.
!# all of the abo%e

Topic: Evidence on Purc!asing Power Parity

/;. ?enerally #nfa%orable e%idence on PPP s#ggests that
A. s#bstantial barriers to international coodity arbitrage exist.
". tariffs and $#otas iposed on international trade can explain at least soe of the e%idence.
C. shipping costs can a&e it diffic#lt to directly copare coodity prices.
!# all of the abo%e

Topic: Evidence on Purc!asing Power Parity

00. !he price of a >c'onaldGs "ig >ac sand-ich
A. is abo#t the sae in the 1)0 co#ntries that >c'onalds does b#siness in.
# %aries considerably across the -orld in dollar ters.
C. s#pports PPP.
'. none of the abo%e.

6-0)
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
01. !he Fisher effect can be -ritten for the 7nited 1tates asO
A#
".
C.
'.

Topic: Fis!er E##ects

0). For-ard parity states that
A# any for-ard prei# or disco#nt is e$#al to the expected change in the exchange rate.
". any for-ard prei# or disco#nt is e$#al to the act#al change in the exchange rate.
C. the noinal interest rate differential reflects the expected change in the exchange rate.
'. an increase *decrease+ in the expected inflation rate in a co#ntry -ill ca#se a proportionate
increase *decrease+ in the interest rate in the co#ntry.

Topic: Fis!er E##ects

0/. !he International Fisher Effect s#ggests that
A. any for-ard prei# or disco#nt is e$#al to the expected change in the exchange rate.
". any for-ard prei# or disco#nt is e$#al to the act#al change in the exchange rate
C# the noinal interest rate differential reflects the expected change in the exchange rate.
'. an increase *decrease+ in the expected inflation rate in a co#ntry -ill ca#se a proportionate
increase *decrease+ in the interest rate in the co#ntry.

Topic: Fis!er E##ects

6-0/
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
00. !he Fisher effect states that
A. any for-ard prei# or disco#nt is e$#al to the expected change in the exchange rate.
". any for-ard prei# or disco#nt is e$#al to the act#al change in the exchange rate.
C. the noinal interest rate differential reflects the expected change in the exchange rate.
!# an increase *decrease+ in the expected inflation rate in a co#ntry -ill ca#se a proportionate
increase *decrease+ in the interest rate in the co#ntry.

Topic: Fis!er E##ects

03. If yo# co#ld acc#rately and consistently forecast exchange rates
A. this -o#ld be a %ery handy thing as girls prefer g#ys -ith s&ills.
". yo# co#ld ipress yo#r dates.
C. yo# co#ld a&e a great deal of oney.
!# all of the abo%e

Topic: Forecasting Ec!ange Rates

06. !he ain approaches to forecasting exchange rates are
A# Efficient ar&et9 F#ndaental9 and !echnical approaches.
". Efficient ar&et and !echnical approaches.
C. Efficient ar&et and F#ndaental approaches.
'. F#ndaental and !echnical approaches.

Topic: Forecasting Ec!ange Rates

0<. !he benefit to forecasting exchange rates
A. are greatest d#ring periods of fixed exchange rates.
". are nonexistent no- that the e#ro and dollar are the biggest gae in to-n.
C# accr#e to9 and are a %ital concern for9 >(Cs for#lating international so#rcing9
prod#ction9 financing and ar&eting strategies.
'. all of the abo%e

Topic: Forecasting Ec!ange Rates

6-00
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
0C. !he Efficient >ar&ets @ypothesis states
A. ar&ets tend to e%ol%e to lo- transactions costs and speedy exec#tion of orders.
# c#rrent asset prices *e.g. exchange rates+ f#lly reflect all the a%ailable and rele%ant
inforation.
C. c#rrent exchange rates cannot be explained by s#ch f#ndaental forces as oney s#pplies9
inflation rates and so forth.
'. none of the abo%e

Topic: E##icient $arket Approac!

0;. ?ood9 inexpensi%e9 and fairly reliable predictors of f#t#re exchange rates incl#de
A. todayGs exchange rate.
". c#rrent for-ard exchange rates *e.g. the six-onth for-ard rate is a pretty good predictor
of the spot rate that -ill pre%ail six onths fro today+.
C. esoteric f#ndaental odels that ta&e an econoetrician to #se and no one can explain.
!# both a+ and b+

Topic: E##icient $arket Approac!

30. ,hich of the follo-ing is a tr#e stateent:
A# ,hile researchers fo#nd it diffic#lt to re.ect the rando -al& hypothesis for exchange
rates on epirical gro#nds9 there is no theoretical reason -hy exchange rates sho#ld follo- a
p#re rando -al&.
". ,hile researchers fo#nd it easy to re.ect the rando -al& hypothesis for exchange rates on
epirical gro#nds9 there are strong theoretical reasons -hy exchange rates sho#ld follo- a
p#re rando -al&.
C. ,hile researchers fo#nd it diffic#lt to re.ect the rando -al& hypothesis for exchange rates
on epirical gro#nds9 there are copelling theoretical reasons -hy exchange rates sho#ld
follo- a p#re rando -al&.
'. (one of the abo%e

Topic: E##icient $arket Approac!

6-03
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
31. If the exchange rate follo-s a random walk
A. the f#t#re exchange rate is #npredictable.
# the f#t#re exchange rate is expected to be the sae as the c#rrent exchange rate9 St H
E*StP1+.
C. the best predictor of f#t#re exchange rates is the for-ard rate Ft H E*StP1QIt+.
'. both b+ and c+

Topic: E##icient $arket Approac!

3). Ene iplication of the rando -al& hypothesis is
A# gi%en the efficiency of foreign exchange ar&ets9 it is diffic#lt to o#tperfor the ar&et-
based forecasts #nless the forecaster has access to pri%ate inforation that is not yet reflected
in the c#rrent exchange rate.
". gi%en the efficiency of foreign exchange ar&ets9 it is diffic#lt to o#tperfor the ar&et-
based forecasts #nless the forecaster has access to pri%ate inforation that is already reflected
in the c#rrent exchange rate.
C. gi%en the relati%e inefficiency of foreign exchange ar&ets9 it is diffic#lt to o#tperfor the
technical forecasts #nless the forecaster has access to pri%ate inforation that is not yet
reflected in the c#rrent f#t#res exchange rate.
'. none of the abo%e

Topic: E##icient $arket Approac!

3/. !he rando -al& hypothesis s#ggests that
A# the best predictor of the f#t#re exchange rate is the c#rrent exchange rate.
". the best predictor of the f#t#re exchange rate is the c#rrent for-ard rate.
C. both a+ and b+ are consistent -ith the efficient ar&et hypothesis.
'. (one of the abo%e

Topic: E##icient $arket Approac!

6-06
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
30. ,ith regard to f#ndaental forecasting %ers#s technical forecasting of exchange rates
A. the technicians tend to #se Rca#se and effectR odels.
". the f#ndaentalists tend to belie%e that Rhistory -ill repeat itselfR is the best odel.
C. both a+ and b+
!# none of the abo%e

Topic: Fundamental Approac!

33. ?enerating exchange rate forecasts -ith the f#ndaental approach in%ol%es
A. loo&ing at charts of the exchange rate and extrapolating the patterns into the f#t#re
". estiation of a structural model
C. s#bstit#ting the estiated %al#es of the independent %ariables into the estiated str#ct#ral
odel to generate the forecast
!# both b+ and c+

Topic: Fundamental Approac!

36. ,hich of the follo-ing iss#es are diffic#lties for the f#ndaental approach to exchange
rate forecasting:
A. Ene has to forecast a set of independent %ariables to forecast the exchange rates.
Forecasting the forer -ill certainly be s#b.ect to errors and ay not be necessarily easier
than forecasting the latter.
". !he paraeter %al#es9 that is the Gs and Gs9 that are estiated #sing historical data ay
change o%er tie beca#se of changes in go%ernent policies and4or the #nderlying str#ct#re
of the econoy. Either diffic#lty can diinish the acc#racy of forecasts e%en if the odel is
correct.
C. !he odel itself can be -rong.
!# All of the abo%e

Topic: Fundamental Approac!

6-0<
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
3<. Researchers ha%e fo#nd that the f#ndaental approach to exchange rate forecasting
A. o#tperfors the efficient ar&et approach.
# fails to ore acc#rately forecast exchange rates than either the rando -al& odel or the
for-ard rate odel.
C. fails to ore acc#rately forecast exchange rates than the rando -al& odel b#t is better
than the for-ard rate odel.
'. o#tperfors the rando -al& odel9 b#t fails to ore acc#rately forecast exchange rates
than the for-ard rate odel.

Topic: Fundamental Approac!

3C. Acadeic st#dies tend to discredit the %alidity of technical analysis. ,hich of the
follo-ing is tr#e:
A. !his can be %ie-ed as s#pport technical analysis.
# It can be rational for indi%id#al traders to #se technical analysisMif eno#gh traders #se
technical analysis the predictions based on it can becoe self-f#lfilling to soe extent9 at least
in the short-r#n.
C. !hat can be explained by the diffic#lty professors ay ha%e in differentiating bet-een
technical analysis and f#ndaental analysis.
'. (one of the abo%e

Topic: Tec!nical Approac!

3;. !he o%ing a%erage crosso%er r#le
A. is a f#ndaental approach to forecasting exchange rates.
# states that a crosso%er of the short-ter o%ing a%erage abo%e the long-ter o%ing
a%erage signals that the foreign c#rrency is appreciating.
C. states that a crosso%er of the short-ter o%ing a%erage abo%e the long-ter o%ing
a%erage signals that the foreign c#rrency is depreciating.
'. none of the abo%e

Topic: Tec!nical Approac!

6-0C
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
60. According to the technical approach9 -hat atters in exchange rate deterination is
A# the past beha%ior of exchange rates.
". the %elocity of oney.
C. the f#t#re beha%ior of exchange rates.
'. the beta.

Topic: Tec!nical Approac!

61. 1t#dies of the acc#racy of paid exchange rate forecasters
A. tend to s#pport the %ie- that Ryo# get -hat yo# pay forR.
". tend to s#pport the %ie- that forecasting is easy9 at least -ith regard to a.or c#rrencies
li&e the e#ro and Japanese yen.
C. tend to s#pport the %ie- that ban&s do their best forecasting -ith the yen.
!# none of the abo%e

Topic: Per#ormance o# t!e Forecasters

6). According to the research in the acc#racy of paid exchange rate forecasters9
A# as a gro#p9 they do not do a better .ob of forecasting the exchange rate than the for-ard
rate does.
". the a%erage forecaster is better than a%erage at forecasting.
C. the forecasters do a better .ob of predicting the f#t#re exchange rate than the ar&et does.
'. none of the abo%e

Topic: Per#ormance o# t!e Forecasters

6/. According to the research in the acc#racy of paid exchange rate forecasters9
A# yo# can a&e ore oney selling forecasts than yo# can follo-ing forecasts.
". the a%erage forecaster is better than a%erage at forecasting.
C. the forecasters do a better .ob of predicting the f#t#re exchange rates than the ar&et does.
'. none of the abo%e.

Topic: Per#ormance o# t!e Forecasters

6-0;
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
60. According to the onetary approach9 -hat atters in exchange rate deterination are
A. the relati%e oney s#pplies.
". the relati%e %elocities of onies.
C. the relati%e national o#tp#ts.
!# all of the abo%e

Topic: Appendi %A: Purc!asing Power Parity and Ec!ange Rate "etermination

63. According to the onetary approach9 the exchange rate can be expressed as
A#
".
C.
'. none of the abo%e

Topic: Appendi %A: Purc!asing Power Parity and Ec!ange Rate "etermination


Short Answer Questions


Please note that yo#r ans-ers are -orth 8ero points if they do not incl#de c#rrency sybols
*29 5+

6-30
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
66. If yo# borro-ed 5190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:


Topic: Covered Interest Arbitrage

6<. If yo# borro-ed 2190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:


Topic: Covered Interest Arbitrage

6C. If yo# had borro-ed 2190009000 and traded for e#ro at the spot rate9 ho- any 5 do yo#
recei%e:


Topic: Covered Interest Arbitrage

6-31
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
6;. If yo# had 5190009000 and traded it for 71' at the spot rate9 ho- any 71' -ill yo#
get:


Topic: Covered Interest Arbitrage

<0. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
exchange rate in 2 per 5 that satisfies IRP fro the perspecti%e of a c#stoer that borro-ed
21 traded for 5 at the spot and in%ested at i5 H 06.

Feedbac&O



Topic: Covered Interest Arbitrage

6-3)
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
<1. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
exchange rate in 2 per 5 that that satisfies IRP fro the perspecti%e of a c#stoer -ho
borro-ed 519 traded for dollars at the spot rate and in%ested at i2 H )6.

Feedbac&O



Topic: Covered Interest Arbitrage

6-3/
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
<). !here is *at least+ one profitable arbitrage at these prices. ,hat is it:



Topic: Covered Interest Arbitrage


Please note that yo#r ans-ers are -orth 8ero points if they do not incl#de c#rrency sybols
*29 5+

6-30
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
</. If yo# borro-ed 5190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:


Topic: Covered Interest Arbitrage

<0. If yo# borro-ed 2190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:


Topic: Covered Interest Arbitrage

<3. If yo# had borro-ed 2190009000 and traded for e#ro at the spot rate9 ho- any 5 do yo#
recei%e:


Topic: Covered Interest Arbitrage

6-33
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
<6. If yo# had 5190009000 and traded it for 71' at the spot rate9 ho- any 71' -ill yo#
get:


Topic: Covered Interest Arbitrage

<<. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
exchange rate in 2 per 5 that satisfies IRP fro the perspecti%e of a c#stoer that borro-ed
21 traded for 5 at the spot and in%ested at i5 H /6.

Feedbac&O



Topic: Covered Interest Arbitrage

6-36
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
<C. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
exchange rate in 2 per 5 that that satisfies IRP fro the perspecti%e of a c#stoer -ho
borro-ed 519 traded for dollars at the spot rate and in%ested at i2 H 06.

Feedbac&O



Topic: Covered Interest Arbitrage

6-3<
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
<;. !here is *at least+ one profitable arbitrage at these prices. ,hat is it:




Topic: Covered Interest Arbitrage

Ass#e that yo# are a retail c#stoer *i.e. yo# b#y at the as& and sell at the bid+.

Please note that yo#r ans-ers are -orth 8ero points if they do not incl#de c#rrency sybols
*29 5+

6-3C
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
C0. If yo# borro-ed 5190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:


Topic: Covered Interest Arbitrage

C1. If yo# borro-ed 2190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:


Topic: Covered Interest Arbitrage

C). If yo# had borro-ed 2190009000 and traded for e#ro at the spot rate9 ho- any 5 do yo#
recei%e:


Topic: Covered Interest Arbitrage

6-3;
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
C/. If yo# had 5190009000 and traded it for 71' at the spot rate9 ho- any 71' -ill yo#
get:


Topic: Covered Interest Arbitrage

C0. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
I! exchange rate in 2 per 5 that satisfies IRP fro the perspecti%e of a c#stoer.


Topic: Covered Interest Arbitrage

C3. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
AS" exchange rate in 2 per 5 that that satisfies IRP fro the perspecti%e of a c#stoer.


Topic: Covered Interest Arbitrage

6-60
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
C6. !here is *at least+ one profitable arbitrage at these prices. ,hat is it:



Topic: Covered Interest Arbitrage

Ass#e that yo# are a retail c#stoer


Please note that yo#r ans-ers are -orth 8ero points if they do not incl#de c#rrency sybols
*29 5+

6-61
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
C<. If yo# borro-ed 5190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:


Topic: Covered Interest Arbitrage

CC. If yo# borro-ed 2190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:


Topic: Covered Interest Arbitrage

C;. If yo# had borro-ed 2190009000 and traded for e#ro at the spot rate9 ho- any 5 do yo#
recei%e:


Topic: Covered Interest Arbitrage

6-6)
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
;0. If yo# had 5190009000 and traded it for 71' at the spot rate9 ho- any 71' -ill yo#
get:


Topic: Covered Interest Arbitrage

;1. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
I! exchange rate in 2 per 5 that that satisfies IRP fro the perspecti%e of a c#stoer.


Topic: Covered Interest Arbitrage

;). 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
AS" exchange rate in 2 per 5 that that satisfies IRP fro the perspecti%e of a c#stoer.


Topic: Covered Interest Arbitrage

6-6/
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
;/. !here is *at least+ one profitable arbitrage at these prices. ,hat is it:



Topic: Covered Interest Arbitrage

Ass#e that yo# are a retail c#stoer


Please note that yo#r ans-ers are -orth 8ero points if they do not incl#de c#rrency sybols
*29 5+

6-60
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
;0. If yo# borro-ed 5190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:


Topic: Covered Interest Arbitrage

;3. If yo# borro-ed 2190009000 for one year9 ho- #ch oney -o#ld yo# o-e at at#rity:


Topic: Covered Interest Arbitrage

;6. If yo# had borro-ed 2190009000 and traded for e#ro at the spot rate9 ho- any 5 do yo#
recei%e:


Topic: Covered Interest Arbitrage

6-63
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
;<. If yo# had 5190009000 and traded it for 71' at the spot rate9 ho- any 71' -ill yo#
get:


Topic: Covered Interest Arbitrage

;C. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
I! exchange rate in 2 per 5 that that satisfies IRP fro the perspecti%e of a c#stoer.


Topic: Covered Interest Arbitrage

;;. 71I(? FE7R PRESIE71 A(1,ER1 and a bit ore -or&9 find the 1-year for-ard
AS" exchange rate in 2 per 5 that that satisfies IRP fro the perspecti%e of a c#stoer.


Topic: Covered Interest Arbitrage

6-66
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.
Chapter 06 - International Parity Relationships and Forecasting Foreign Exchange Rates
100. !here is *at least+ one *sallish+ profitable arbitrage at these prices. ,hat is it:



Topic: Covered Interest Arbitrage

6-6<
= )01) by >c?ra--@ill Ed#cation. !his is proprietary aterial solely for a#thori8ed instr#ctor #se. (ot a#thori8ed for sale or distrib#tion in
any anner. !his doc#ent ay not be copied9 scanned9 d#plicated9 for-arded9 distrib#ted9 or posted on a -ebsite9 in -hole or part.