1. If we set the real effective exchange rate index between Canada and the United States equal to 100 in 1998, and find that the U.S. dollar has risen to a value of 112.6, then from a competitive perspective the U.S. dollar is:

(A) overvalued by 6.7%

(B) overvalued by 12.6%

(C) undervalued by 6.7%

(D) undervalued by 12.6%

(E) the US dollar is more competitive

2. Mary Fischer is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently, the spot price for the Japanese yen is 129.87/$ and the 6-month forward rate is 128.53/$. Mary thinks the yen will move to 128.00/$ in the next six months. Mary should ________ at ________ to profit from changing currency values.

(A) buy yen; the forward rate

(B) buy dollars; the forward rate

(C) sell yen; the forward rate

(D) short yen; the spot rate

(E) There is not enough information to answer this question

3. Naira Bolivar is the Head FX trader at More Capital, a hedge fund. Looking to profit from a triangular arbitrage trade she has US$1,000,000.00 available to invest in FX. After calling her friends in the Street she receives the following quotes: US$1.3201/ from Village Bank; 1.1898/ from TJ Magnum; and US$1.1150/ from Effex.com. Naira could

(A) make a loss of US$4,920.00 by doing a triangular arbitrage

(B) earn a profit of US$4,944.32 by doing a triangular arbitrage

(C) make a loss of US$4,944.32 by doing a triangular arbitrage

(D) earn a profit of US$4,920.00 by doing a triangular arbitrage

(E) make no money through a riskless triangular arbitrage

4. According to the monetary approach to the balance of payments and exchange rates, please mark which of the following statements are True (T) or False (F)

( ) Under a fixed exchange rate system and expansion of credit is equal to the loss of international reserves

( ) Under a fixed exchange rate system the market-determined the money supply via the balance of payments ( ) Under a flexible exchange rate system the central bank determines the money supply

( ) Under a flexible exchange rate system, if the central bank cuts interest rates the exchange rate will likely appreciate versus the USD

( ) Under a fixed exchange rate system, the central bank will have to devalue if it runs out of international reserves