QUESTION 21

1. Which of the following statements regarding currency futures contracts and forward contracts is NOT true?

		A) A futures contract is a standardized amount per currency whereas the forward contact is for any size desired.
		B) A futures contract is for a fixed maturity whereas the forward contract is for any maturity you like up to one year.
		C) Futures contracts trade on organized exchanges whereas forwards take place between individuals and banks with other banks via telecom linkages.
		D) All of the above are true.

QUESTION 22

1. Suppose Japanese yen money market annual rate is .60% and U.S. money market has an annual rate of 4.50%. The predictions on the spot rate in 6 months made by financial analysts X and Y are 116/$ and 114/$ respectively. If the spot rate today is 115/$, which prediction do you think is more reasonable, why?

		A) Analysts X, because US dollar interest is higher than Japanese yen, so should appreciate against $.
		B) Analysts X, because US dollar interest is higher than Japanese yen, so should depreciate against $.
		C) Analysts Y, because US dollar interest is higher than Japanese yen, so should depreciate against $.
		D) Analysts Y, because US dollar interest is higher than Japanese yen, so should appreciate against $.

QUESTION 23

1. If a financial manager with an interest liability on a future date were to sell Futures and interest rates end up going up, the position outcome would be:

		A) Futures price falls; short earns a profit.
		B) Futures price rises; short earns a loss.
		C) Future price falls; long earns a loss.
		D) Futures price rises; long earns a profit.

QUESTION 24

1. According to the International Fisher Effect, the forecast change in the spot rate between two countries is equal to:

		A) the current spot rate multiplied by the ratio of the inflation rates in the respective countries.
		B) but the opposite sign to the difference between nominal interest rates.
		C) but the opposite sign to the difference between inflation rates.
		D) but the opposite sign to the difference between real interest rates.

QUESTION 25

1. The writer of a currency option has

		a) higher initial costs than the buyer of the option.
		b) unlimited profit potential and limited loss potential.
		c) unlimited loss potential and limited profit potential.
		d) unlimited profit potential and unlimited loss potential.

QUESTION 26

1. Which of the following versions of PPP is thought to be the most relevant to possibly explaining what drives exchange rate values?

		The Law of One Price
		Absolute Purchasing Power Parity
		Relative Purchasing Power Parity
		The International Fisher Effect

QUESTION 27

1. Which following statement is Incorrect?

		A). By comparing the prices of identical products denominated in different currencies, we could determine the real or PPP exchange rate that should exist if markets were efficient.
		B). The relationship between the percentage change in the spot exchange rate over time and the differential between comparable interest rates in different national capital markets is known as the international Fisher effect.
		C). If the assumptions of the absolute version of the PPP theory are relaxed a bit more, we observe what is termed relative purchasing power parity (RPPP), which holds that PPP is not particularly helpful in determining what the spot rate is today, but that the relative change in prices between two countries over a period of time determines the change in the exchange rate over that period.
		D). The theories about how exchange rate always work out to be true when compared to what students and practitioners observe in the real world. They are central to any understanding of how multinational business is conducted and funded in the world today.

QUESTION 28

1. Foreign currency market participants in the futures market wishing to lock in a price at which they could _______ a foreign currency will ________ a futures contract.

		a) buy; sell
		b) sell; sell
		c) sell; buy
		d) All of the above

QUESTION 29

1. One year ago the spot rate of U.S. dollars for Canadian dollars was $1/C$1. Since that time the rate of inflation in the U.S. has been 4% greater than that in Canada. Based on the theory of Relative PPP, the current spot exchange rate of U.S. dollars for Canadian dollars should be approximately ____________.

		A) $0.60/C$1
		B) $0.96/C$1
		C) $1.04/C$1
		D) $1.40/C$1

QUESTION 30

1. A foreign currency ________ option gives the writer (the seller) the obligation to _______ a foreign currency whereas a foreign currency _______ option gives the writer the obligation to _________ an option.

		a) put, buy, put, sell
		b) put, hold, call, release
		c) call, sell, put, buy
		d) call, buy, put, sell