Multiple results possible.

1 Question Which of the following statements about arbitrage and foreign exchange markets are cor- rect?

1. (a) Locational arbitrage ensures that bilateral exchange rates are in equilibrium.
2. (b) Even if quoted exchange rates do not allow arbitrage, banks quoting the lowest offer prices in a currency will attract the bulk of customer purchases in that currency.
3. (c) A bank is in a long EUR and short JPY position when it has purchased EUR and sold JPY.
4. (d) A bank is in a short EUR and short JPY position when it has purchased EUR and sold JPY.
5. (e) A currency cross rate does not involve the domestic currency.

2.Question Which of the following statements about real and nominal exchange rates are correct?

1. (a) Real (inflation adjusted) exchange rate changes have little economic significance.
2. (b) A real appreciation in the value of a currency increases the purchasing power of that currency relative to other currencies.
3. (c) A nominal appreciation of the domestic currency raises the price of domestic goods relative to foreign goods.
4. (d) For daily measurement intervals, both nominal and real exchange rates are close to a random walk.
5. (e) A real appreciation of the domestic currency lowers the relative price of foreign goods.

3,Question Which of the following statements about instruments and transactions in the international monetary system are true?

1. (a) Moral hazard is the risk that the existence of a contract will change the behaviors of parties to the contract.
2. (b) IMF loans to troubled economies are unlikely to change the behaviors of investors, because investors can assess the risks of moral hazard for themselves.
3. (c) A subprime CDO is a collateralized debt obligation with a yield (i.e., a market interest rate) that is below the prime lending rate.
4. (d) Liquidity refers to the value of the expected future cash flows of an investment.
5. (e) Liquidity refers to the ease with which an asset can be exchanged for another asset of equal value.

4.Question

Which of the following statements about the international monetary system are true?

1. (a) Markets are integrated when an asset sells for the same price wherever it is traded.
2. (b) Prices in the worlds financial markets are becoming increasingly segmented as local political forces work to dismantle trade barriers that protect their local industries.
3. (c) The international monetary system refers to the global network of governmental and commercial institutions within which currency exchange rates are determined.
4. (d) The International Monetary Funds principal mission is to provide funds for economic development in developing economies.
5. (e) The Basel Accord established the International Monetary Fund and the World Bank.

5..Question

To which price do future prices converge at expiration?

1. Dollar price. (b) Forward price. (c) Market price. (d) Shadow price. (e) Spot price.

6. Which of the following statements about forward markets and purchasing power parity are correct?
   1. (a) Forward premiums and discounts depend on interest rate differentials.
   2. (b) Deviations from purchasing power parity in real exchange rates can persist for several years.
   3. (c) Because currencies are standardized assets that are actively traded in international markets, real deviations from purchasing power parity are rare and fleeting.
   4. (d) Real changes in currency values reflect changes in relative purchasing power.
   5. (e) Real exchange rate changes are determined by inflation differentials.
7. Question Which of the following is an alternative name for the relation between interest rate differen- tials and expected inflation differentials?

(a) Forward parity. (b) Interest rate parity. (c) Relative purchasing power parity. (d) International Fisher relation. (e) Relative forward interest rate relation.

8. Question Which of the following statements about purchasing and exercising options are correct?
   1. (a) American options are exercisable any time until expiration.
   2. (b) European options are exercisable any time until expiration.
   3. (c) There is often an imbalance between the number of currency option contracts that are bought and sold on currency option exchanges.
   4. (d) A currency call option is in the money when the exercise price is less than the under- lying exchange rate.
   5. (e) A currency put option is out of the money when the underlying exchange rate is below the exercise price.
9. Question Which of the following statements about the market for currency options are correct?
   1. (a) Currency options are traded only at organized options exchanges, such as the Inter- national Monetary Market of the Chicago Mercantile Exchange.
   2. (b) Over-the-counter currency options are standardized to provide added liquidity.
   3. (c) There is an active over-the-counter market in currency options operated by large com-

mercial and investment banks.

4. (d) The deliverable asset of a currency option is the currency being bought or sold.
5. (e) Currency options on spot and on futures prices are essentially equivalent in their ability to hedge currency risk.

10.Question Which of the following statements about the relationships among exchange rates are cor- rect?

1. (a) An increase in the real value of foreign currencies helps the domestic economy as imported goods and raw materials cost less.
2. (b) An increase in the nominal exchange rate helps the domestic economy as imported goods and raw materials cost less.
3. (c) There is no correlation between annual changes in real exchange rates.
4. (d) Relative purchasing power parity holds over the short run.
5. (e) Empirical tests indicate that persistent inflation differentials between two currencies eventually have an impact on nominal exchange rates.

11. Question Which of the following statements concerning changes to firm risk when internationalizing are true?

1. (a) Empirical evidence suggests that the standard deviation of multi-country portfolios is higher than that of single-country portfolios.
2. (b) The diversification effect of international expansion reduces expected cash flows in only the project that represents international expansion.
3. (c) Presence in several, imperfectly correlated markets increases diversification.
4. (d) Expropriation and blockades inhibiting the repatriation of profits might be challenges to cross-border investment projects.
5. (e) Discounted expected losses from projects in foreign countries can be subtracted from discounted expected gains to accommodate different scenarios in an NPV computa- tion.