Several factors affect the exchange rate of a currency with another currency. Which of the following statements are true about the factors that have an impact on exchange rates? Check all that apply. When a government limits imports and restricts foreign exchange transactions, its currency's value tends to increase relative to other currencies. An increase in inflation tends to increase the currency's value with respect to other currencies with lower inflation. If a government intends to prevent its currency's value from falling relative to other currencies, it will purchase its currency from sellers in the market. If the demand for a currency increases, the currency's value will increase relative to other currencies. The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following: Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$): Spot Exchange Rate One-Year Forward Exchange Rate Canadian dollar (U.S. dollar/Canadian dollar) 0.8903 The current one-year interest rate on U.S. Treasury securities is 7.77%. If interest rate parity holds, what is the expected yield on one-year Canadian securities of equal risk? 6.00% 5.72% 4.63% 5.45% Interest rate parity recognizes that when you invest in a country other than your home country, two factors affect your investment-returns on the investment itself and changes in the exchange rate. Which of the following would cause the overall return on your investment to be higher than the investment's stated return? Your home currency appreciates relative to the currency in which the investment is denominated. The currency in which the investment is denominated appreciates relative to your home currency. The currency in which the investment is denominated depreciates relative to your home currency. Spot Exchange Rates 0.5376 Forward Exchange Rates 30 Days 60 Days 90 Days 0.5395 0.5412 0.5435 British pound (pound/dollar) The British pound is selling at a in the forward market. discount Suppose you make a 550,000 sa h customer who has 60 days to pay you in cash. The customer will pay you in British pounds, but your company is based in the United States, so you are most concerned with the premium of the payment. If the customer pays you 550,000 today, how much is that worth in dollars? $818,452 $1,023,065 $869,605 $716.146 Assume that the forward market is correct and the 60-day forward exchange rate quoted in the newspaper today (above) is the spot exchange rate 60 days from now. If the customer waits the full 60 days and pays you 550,000, how much have you lost (in dollar terms) due to exchange rate fluctuations? $6,805 $6,125 $5,784 $5,104 The theory of purchasing power parity (PPP) states that in the long-run exchange rates between two countries adjusts so that the price of an identical good is the same when expressed in the same currency. A gaming console costs 175.23 in England. The spot rate is currently $1.9956 per pound. 102 50378 0330378 Assuming that PPP holds true, what is the price of the gaming console in the United States? $105.37 $279.75 $384.66 $349.69 Suppose the price of the gaming console in the United States was actually $384.66. Assuming no transaction costs, transportation costs, or import restrictions, what does PPP predict would happen to the demand for the gaming console in the United States? The demand for the gaming console would decrease in the United States. The demand for the gaming console would increase in the United States. Relative inflation rates affect interest rates, exchange rates, the overall economic health of a country, and the operations and profitability of multinational companies. Consider the following statement: Countries with lower inflation rates will have lower interest rates. Based on your understanding of the relationship between relative inflation rates and exchange rates, identify whether the preceding statement is valid or invalid. The statement is invalid, because the nominal interest rate is independent of the inflation rate. The statement is valid, because the nominal interest rate is the sum of the real interest rate plus inflation, so lower inflation rates would result in lower interest rates. If companies borrow from countries with low interest rates, the potential gains from the interest savings will likely be by the losses from currency appreciation. The currency of a country with a lower inflation rate than the U.S. inflation rate will over time against the dollar