Part2 True-false Questions. And correct the questions you think are wrong. 1. The forward contract can hedge future receivables or payables in foreign currencies to insulate the firm against exchange rate risk 2. A low inflation rate tends to increase imports and decrease exports, thereby decreasing the current account deficit, other things equal. 3. In foreign exchange market there are similar quotes facilitated by exchange arbitrage. 4. At any given point in time, a bank's bid quote will be greater than its ask quote. 5. U.S. dollar deposits in Europe are known as Eurodollars; U.S. dollar deposits in Latin America are known as Latinodollars. 6. The immediate exchange of currencies takes place in the spot market. 7. A floating exchange rate system may correct a trade imbalance automatically 8. Preferred stock remains the most common equity security owned by investors 9. In the event a corporation is liquidated, the corporation must pay all its equity holders before it pays its creditors. 10. A dividend is allocated as a fixed amount per share, with shareholders receiving a dividend in proportion to their shareholding 11. An increase in the trade-weighted value of the dollar indicates a dollar appreciation relative to the currencies of its major trading partners and a worsening of U.S. international competitiveness. Part 3 Short-Answer Questions 1. What is a financial asset's liquidity? 2. Distinguish between primary and secondary markets. Part 4 Calculation and analysis 1. If the real rate of return is 3.5% and expected inflation is 5.4%, according to The Fisher Effect model, what's the nominal interest rate? 2. If the price of a Mini Cooper is EUR12,000 in France and spot exchange rate is GBP 1 EUR 1.4002, then (1) According to PPP what should the price of a Mini Cooper in the UK be? (2) If instead the Mini Cooper is sold for 9,500 in the UK, what may happen? Please explain the detailed process. (3) FHM Customs and Excise of the UK levies an import duty of 20% on manufactured goods, does arbitrage still exist? Please explain the detailed process. 3. Suppose an American investor have $1 to invest for one year. He can either invest in the US at i. or convert $ for E at the spot rate S. (When stated in direct terms), and then invest in the UK at i. Future spot rate is Sz Please derive the formula for the International Fisher Effect. The derivation must be clear and detailed