1.Question 1

The price of one Indian rupee (INR) in terms of Australian dollar (AUD) is 0.02. If the price of a basket of goods is INR 50,000 in India and AUD 2000 in Australia, then the real exchange rate of the rupee vis--vis the Australian dollar (treating the rupee as home currency) is __________.

(a) 0.2

(b) 0.5

(c) 1.0

(d) 2.0

2.Question 2

How does a depreciation of the dollar against the yen affect the net exports of the US?

(a) Net exports of the US to Japan and the rest of the world will decline.

(b) Net exports of the US to Japan will rise, but net exports of the US to the rest of the world will remain unchanged.

(c) Net exports of the US to Japan will decline, but net exports of the US to the rest of the world will rise.

(d) Net exports of the US to Japan and the rest of the world will rise.

3.Question 3

You are in charge of managing $10 million for one year. You are allowed to invest only in the US or German government bonds, both of which are considered risk free. The money is needed exactly one year from now in dollars, and you are not allowed to take any risks with it. The interest rates on the dollar and the German bonds are, respectively,i= 0.02 andi= 0.05. The spot exchange rate ise= 0.90/$ and the forward rate ise= 0.945/$.

What is the highest return you can expect on the $10 million? (Answer the number of dollars with no dollar sign or separators.) Assume that any contract you make must be backed by the assets that you already have.

4.Question 4

If covered interest parity holds, foreign interest rates are constant, and the rate of interest on dollar deposits rises, theexcess valueof the dollar in the forward market, (e^f-e)/e __________.

(a) may rise or may decline

(b) must decline

(c) must rise

(d) remains constant

(e) moves in the opposite direction of the expected appreciation of the dollar in the spot market

5.Question 5

Suppose that the interest rate on dollar accounts is equal to 2% (i_$= 0.02), the interest rate on Polish zloty accounts is equal to 4.5% (i_z= 0.045), and the expected exchange rate between the dollar and the zloty one year from now ise^e= 4 z/$. Assume that the (uncovered) interest parity holds.

Find the spot exchange rate,e. (Answer in z/$ and round to the nearest tenth.)

6.Question 6

Suppose that the interest rate on dollar accounts is equal to 2% (i_$= 0.02), the interest rate on Polish zloty accounts is equal to 4.5% (i_z= 0.045), and the expected exchange rate between the dollar and the zloty one year from now ise^e= 4 z/$. Assume that the (uncovered) interest parity holds.

What would the spot rate,e, be if the expected exchange rate remains the same and the interest rate on Polish assets declines toi_z= 0.02? (Answer in z/$.)

7.Question 7

Assuming that the covered and uncovered interest parities both hold at a given time and thate^fande^erepresent forward and expected exchange rates, we will have ___________.

(a) e^f> e^e

(b) e^f< e^e

(c) e^f= e^e

(d) e^fande^ecannot be compared.

8.Question 8

e^fanderepresent forward and spot exchange rates, andiandi*represent the interest rates on domestic currency and interest rate on foreign currency, respectively.

Which of the following equations can represent the Covered Interest Parity? Check all that apply.

(a) (1+i*)e^f= (1+i)e

(b) (1+i)e^f= (1+i*)e

(c) (e^f-e)/e= (i*-i)/(1+i)

(d) (1+i)/(1+i*)= e/e^f

9.Question 9

Suppose Botswana decides to peg its currency,pula, to the US dollar at the of rate 0.1$/pula and allows capital to free flow in and out of the country so that the interest parity condition holds. If everyone views the peg as credible and comes to expect the exchange rate to remain constant in the coming years, then the one-year, risk-free interest rate in Botswana will

(a) be lower than the one-year, risk-free interest rate in the US.

(b) be higher or lower than the one-year, risk-free interest rate in the US.

(c) be equal to the one-year, risk-free interest rate in the US.

(d) be higher than the one-year, risk-free interest rate in the US.

10.Question 10

Suppose (1+i)e^f< (1+i*)ewheree^fanderepresent forward (a year from now) and spot exchange rates andiandi*represent the interest rates on domestic currency and the interest rate on foreign currency, respectively.

If the forward rate for six months from now is equal toe+ (e^f-e)/2, which of the following will guarantee higher returns a year from now?

(a) Keeping Home currency in interest bearing form now and converting to Foreign currency a year later

(b) Converting to Foreign currency now and keeping the foreign currency in interest bearing form for a year

(c) Keeping Home currency in interest bearing form for six months and then converting it to foreign currency and keeping foreign currency bonds for

the rest of year

(d) All three of the above will give the same returns