1. When the foreign exchange market opens in the United States each morning, the opening exchange rate quotations will be based on the:

a. closing prices in the United States during the previous day.

b. closing prices in Canada during the previous day.

c. prevailing prices in locations where the foreign exchange markets are already open.

d. officially set by central banks before the U.S. market opens.

2. A share of the ADR of a Dutch firm represents one share of that firm's stock that is traded on a Dutch stock exchange. The share price of the firm was 15 euros when the Dutch market closed. As the U.S. market opens, the euro is worth $1.10. Thus, the price of the ADR should be ____.

a. $13.64

b. $15.00

c. $16.50

d. 16.50 euros

e. None of these are correct.

3. If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction.

a. liquid; highly sensitive

b. illiquid; insensitive

c. illiquid; highly sensitive

d. None of these are correct.

4. The exchange rates of smaller countries are very stable because the market for their currency is very liquid.

a. True

b. False

5. Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal.

a. increase; the U.S. dollar

b. increase; nondollar currencies

c. decrease; nondollar currencies

d. decrease; the U.S. dollar

Section B: [3+2=5 marks]

1. You just came back from Australia to US. You still have A$1000 from your trip and can change them to dollars at the airport, the bid/ask quote for Australian dollars given by airport foreign exchange is $.76/$.80. Next week you will be going to Mexico and will need Mexican peso. The bid/ask quote for Mexican peso given by airport foreign exchange is $.05/$.075. You met a tourist at the airport who is from Mexico and is on his way to Australia. He is willing to buy your A$1000 for 10,250 pesos. How much US dollar can you get if you sell the A$ at the airport foreign exchange? How much Mexican peso can you get in you sell the US dollars at the airport exchange? Should you accept the offer by the tourist or cash the Australian dollars in at the Airport? Explain. [3 marks]

2. Assume that the Japanese government increased the rate of Tariff on US products. Other things being equal, how should this affect the

(a) U.S. demand for Japanese yen,

(b) supply of yen for sale,

(C) the equilibrium value of the yen? (Please show graphically)