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INTERNATIONAL FINANCE COTSAKOS COLLEGE OF BUSINESS THIRD TEST DR. MALINDRETOS INSTRUCTIONS I YOUR GRADE IS BASED ON YOUR CORRECTNESS, CONVICTION, ELABORATION AND ELUCIDATION. II, YOU OUGHT TO DO THE 2 PROBLEMS AND 5 ESSAYS OF YOUR CHOICE. EACH QUESTION IS 15 POINTS FOR A TOTAL OF 105 POINTS. TEST A. PROBLEMS 1. You know the following. The interest rate in the $ is 10% and in the euro it is1 6%. If the spot ER is euro/$ 1 (meaning 1 euro for 1 dollar.) SHOW IN DETAIL what the forward rate will be. Assume that interest rate parity in an absolute form holds true. EXPLAIN your answer. 2. Assume PPP is present. The inflation rate in the US is 4% and in Britain it is 11%. The spot ER between the 2 currencies is $/BP1.4. Expound on what the forward rate should be and WHY B. ESSAYS 1. Kallianotis describes the concept of foreign exchange market efficiency Explain in your own words what it is. 2. Explain translation FE exposure in how it treats the balance sheet and the income statement. Ascertain that you include the treatment of translation loss and gain, the effect it has on income, and the importance of translation gains, or losses. Use both financial accounting statement 8 and 52. You may use a problem to do so. 3. Analyze the concept of transactions exposure. How do we hedge against it? 4. Expound on the concept of operating exposure. Does it support or contradict accounting expoisure? 5. Expound on the impossible trinity. 6. There are numerous critics of both the World Bank and the IMF. Chief among them is Joseph Stiglitz, nobel laureate. They argue that those 2 institutions do not attain their stated missions, and they recommend the wrong policies. Discuss 7. What are the stated objectives of the 2 aforementioned institutions