41. If the British interest rate is 4 percent, the spot exchange rate between the pound and the dollar, E$/ = 1.6, while Ee $/= 1.75, then the British rate of return is 13.75 percent. Select one: a. True b. False

42. If investor expectations change such that they now expect the yen to appreciate further against the dollar, it will cause the rate of return on yen to shift to the right. Select one: a. False b. True

43. The interest rate parity theory suggests that the actions of importers and exporters, whose transactions are recorded on the current account, induce changes in the exchange rate. Select one: a. True b. False

44. When the foreign interest rate is very low, the difference between the domestic and foreign interest rate is approximately equal to the percentage change in the exchange rate. Select one: a. False b. True

45. Suppose the Fed announces its intention of conducting an open market purchase of bonds. This can cause an increase in the expected exchange rate E$/e , which in turn will cause a pound appreciation and a dollar depreciation. Select one: a. False b. True

46. The expected rate of return on a British asset depends on two things, the British interest rate and the expected percentage change in the value of the pound. Select one: a. True b. False

47. Suppose the spot Yuan/dollar exchange rate is 6.79. Sue, a Chinese national, has 10,000 Yuan that she wants to invest in a U.S. asset that promises an annual interest of 7 percent. If the expected exchange rate (Yuan/dollar) after a year is 7.2, calculate the rate of return Sue earns on her investment. Select one: a. 0.9 percent b. 6.04 percent c. 5.6 percent d. 13.46 percent

48. If the exchange rate E$/ falls below the equilibrium, investors will shift funds to increase investment in British assets. Select one: a. True b. False

49. Identify the correct statement from the following. Select one: a. If $1 can buy 0.64, then it implies that 1 can buy $0.64. b. The value of the Japanese yen in terms of dollar is the $/ exchange rate. c. The value of a U.S. dollar in terms of British pounds is the $/ exchange rate. d. If $1= 0.64, then 1= $0.36

50. Foreign direct investment in its classic form is defined as a company from one country making a physical investment into building a factory in another country. Select one: a. True b. False

51. David is trying to decide whether to invest in a domestic certificate of deposit (CD) with a 5 percent interest, or to invest in a British CD bearing an interest of 4.5 percent. He knows that the spot exchange rate E$/ = 1.32, while the expected exchange rate a year from now is 1.4. If David wants to invest $3,000 for a year, which option should he choose? Select one: a. He should invest in the domestic asset because the rate of return on the British asset is - 5.97 percent. b. He should invest in the domestic asset because it bears a higher interest rate than the British asset. c. He should invest in the British CD because that is likely to yield a return of 11.4 percent. d. He should invest in the British CD because that is likely to yield a return of 10.8 percent.

52. Consider an American investor considering both domestic and British investment options. If the rate of return on a British asset is negative, it implies that: Select one: a. the American interest rate on a comparable asset is higher than the British interest rate. b. the effect of the British interest rate on the return is stronger than that of the appreciation of the pound. c. the depreciation of the pound has a stronger impact on the return than the British interest rate. d. the investors are expecting the dollar to depreciate.

53. If E$/ = 1.28, then $1 will trade for: Select one:

a. 1.28 b. 0.28 c. 1 d. 0.78

54. Suppose the exchange rate E$/ = 0.01172 today. How much yen would you need (approximately) to buy $200 at this exchange rate? Select one:

a. 2.344 b. 17,064.85 c. 11.72 d. 1,706.48

55. Suppose the Japanese interest rate is 0.03 percent. If the ROR works out to be around -11.3 percent, after taking the Japanese interest rate, the spot yen-dollar exchange rate, and the expected exchange rate into account, then it can be concluded that a Japanese investor would not only earn nothing, but would lose money, if she purchased a Japanese certificate of deposit. Select one: a. False b. True

56. When the forward exchange rate is such that a forward trade costs more than a spot trade today costs, there is said to be an arbitrage. Select one: a. False b. True

57. Consider an American investor considering both domestic and British investment options. If the rate of return on a British asset is negative, it implies that: Select one: a. the effect of the British interest rate on the return is stronger than that of the appreciation of the pound. b. the American interest rate on a comparable asset is higher than the British interest rate. c. there is excess demand for the pound in the Forex market. d. the depreciation of the pound has a stronger impact on the return than the British interest rate.

58. Which of the following statements is true regarding the rate of return on foreign asset? Select one: a. If the domestic currency is expected to depreciate, the rate of return on the foreign asset will be lower than the foreign interest rate. b. If the domestic currency is expected to appreciate, the rate of return on the foreign asset will be lower than the foreign interest rate. c. If the expected exchange rate is same as the spot rate, the rate of return will be lower than the foreign interest rate. d. If the expected exchange rate is same as the spot rate, the rate of return will be lower than the foreign interest rate.

59. The yen/dollar exchange rate fell from just over 92/dollar in June 2010 to 84.7/dollar in August 2010. Meanwhile, the value of the greenback vis--vis the euro changed from $1.19/euro in June to $1.29/euro in August. This means the dollar appreciated with respect to both the yen and the euro. Select one: a. True b. False

60. Assume that the interest rate parity holds between the U.S. and England. Then the rate of return on the British (foreign) investment is negatively related to the expected dollar/pound exchange rate. Select one: a. False b. True

61. Currency transactions by which of the following groups is included in the current account? Select one: a. Mutual funds b. Banks c. Tourists d. Insurance companies

62. Suppose the Mexican government reduces the domestic interest rate to encourage domestic consumption. All other things being equal, this disturbs the interest rate parity between the return on the U.S. and Mexican assets and causes the dollar to appreciate against the peso. Select one: a. False b. True

63. The rate of return on a foreign investment depends not only on the _____ but also on the spot exchange rate and the _____ one year in the future. Select one: a. foreign interest rate; expected exchange rates b. domestic interest rate; foreign interest rate c. expected exchange rate; domestic inflation rate d. expected exchange rate; foreign inflation rate

64. Suppose the spot Yuan/dollar exchange rate is 6.79. Sue, a Chinese national, has 10,000 Yuan that she wants to invest in a U.S. asset that promises an annual interest of 7 percent. Calculate the amount she will earn in dollars after a year. Select one: a. $1,472.75 b. $1,575.85 c. $72,653 d. $67,900

65. Suppose the equilibrium value of E$/ = 95. If the spot exchange rate for some reason is higher at 98, demand for the dollar will increase in the Forex market. Select one: a. False b. True

66. Suppose Joey wants to invest $3,000 for a year in a German certificate of deposit that promises a 9 percent interest. If the spot exchange rate E$/ = 0.80, then he will earn $3937.5 on maturity. Select one: a. False b. True

67. Suppose an importer, who expects to receive his shipment of raw materials worth 15,000 in three months, enters into a forward contract where E/$ is 0.80. If at the time of delivery of the raw materials E/$ = 0.83, this means the trader gains by $677.71 by entering into the forward contract. Select one: a. False b. True

68. Purchasing Canadian dollars in Canadas Forex market and then selling them later in England, once the Canadian dollar has appreciated, can be described as _____. Select one: a. a forward premium b. currency arbitrage c. a forward contract d. hedging

69. Consider a U.S. trader who will receive a shipment of raw materials from a Mexican supplier. However, he expects the dollar to depreciate by the time the shipment reaches him. If the current spot exchange rate is $1 = 12.66 Mexican peso, identify the correct statement form the following. Select one: a. The trader should use the spot exchange rate prevailing at the time of receiving the shipment of raw materials to make his payments to the Mexican suppliers. b. The trader is likely to benefit if he enters into a forward contract. c. The U.S. trader will earn a forward premium by entering into a forward contract, if his expectations about the dollars value are realized. d. The Mexican supplier is likely to benefit if he enters into a forward contract.

70. Suppose a Japanese investor has 50,000 to invest for a year. He has the following information to help him choose between a Japanese certificate of deposit and an Indian certificate of deposit. The Indian currency, rupee, is denoted here by R. ER/ = 0.545, Ee R/ = 0.452 iR = 6 percent, i = 2 percent Identify the correct statement from the following. Select one: a. He will invest the money in the Japanese CD because the return on the Indian investment is -12.09 percent. b. He will invest in the Indian CD because the rate of return is likely to be 24.09 percent. c. He will invest in the Indian CD because the rate of return is likely to be 27.78 percent. d. He will invest in the Japanese CD because the rate of return on the Indian CD is likely to be -15.4 percent.

71. The flow of FDI refers to the amount of FDI undertaken over a given time period (e.g., a year) whilst the stock of FDI refers to the total accumulated value of foreign-owned assets at a given time (which takes into account possible divestment along the way). Select one: a. False b. True

72. The terms long-term, control and controlling-interest distinguishes portfolio investment from foreign direct investment since a foreign direct seeking investor does not seek control or a lasting interest. Select one: a. True b. False

73. A decrease in the expected exchange rate E$/e causes an increase in the rate of return on pound in the short run. Select one: a. False b. True

74. Suppose the spot Yuan/dollar exchange rate is 6.79. Sue, a Chinese national, has 10,000 Yuan that she wants to invest in a U.S. asset that promises an annual interest of 7 percent. This means the amount she will earn in dollars after a year will be $1,575.85. Select one: a. False b. True

75. When the domestic currency is expected to depreciate: Select one: a. the rate of return will be equal to the foreign interest rate. b. the rate of return on the foreign asset will exceed the domestic interest rate. c. the rate of return on the foreign asset will fall short of the foreign interest rate. d. the rate of return on the foreign asset will exceed the foreign interest rate.

76. If the interest rate parity holds between the U.S. and England, then the difference between the domestic interest rate, i$, and the foreign interest rate, i, must always be equal to: Select one: a. i (E$/ -Ee$/)/ E$/ b. (1+ i)(Ee$/ -E$/)/ E$/ c. (1+ i)(E$/ -Ee$/)/ E$/ d. i (Ee$/ -E$/)/ E$/

77. The rate of return on the foreign deposit is _____ related to changes in the foreign interest rate and the _____ and _____ related to the spot foreign currency value. Select one: a. negatively; expected domestic currency value; positively b. positively; expected foreign currency value; negatively c. negatively; expected foreign currency value; negatively d. positively; expected domestic inflation rate; negative

78. If E$/ = 1.6, and Ee $/ in a years time is 1.75, then the return from the appreciation of the pound is 9.4 percent approximately. Select one: a. True b. False

79. According to the market size hypothesis, capital flow from countries with low rates of return to those with high rates of return until equality is realized. Select one: a. True b. False

80. According to the interest rate parity theory interest rates must equalize across countries when the exchange rates are floating. Select one: a. False b. True