Multiple Choice Questions:

1. An investment opportunity in country A provides a return equal to 15% while another investment opportunity in country B offers you 2%. Inflation in country A is 14%, and inflation in country B is 1%. Provided there is no chance of default and both investments pay in USD, which would a rational investor prefer?

a)Prefer country A

b)Prefer country B

c)Indifferent

d)More information is needed

2. A U.S.-based MNC that does significant business in the Eurozone recently issues euro-denominated bonds. At the same time, GOP controlled states pass anti-democratic laws that erode foreign investors' confidence in the United States. What should the MNC do to hedge this risk?

a)Purchase EUR/USD call options.

b)Purchase EUR/USD put options.

c)Sell EUR/USD futures.

d)Purchase EUR/USD futures.

e)Do nothing; the anticipated change exchange rate benefits the MNC.

3.Currency crises generally occur when central banks

a)are reluctant to raise interest rates to defend a currency peg.

b)print too much money and cause hyperinflation.

c)spend too much money and cause deficits to explode.

d)engineer large trade surpluses.

4.Which of the following was NOT a cause of the 1994 Peso Crisis?

a)A presidential candidate was assassinated while on the campaign trail.

b)An insurrection in the Chiapas region.

c)Speculators anticipated that the Banco de Mexico would devalue the peso.

d)The collapse of the Guadalajara Cartel.