Chap020

# Chap020 - Chapter 20 The Foreign Exchange Market Chapter 20...

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Chapter 20 - The Foreign Exchange Market Chapter 20 The Foreign Exchange Market Multiple Choice Questions 1. If a speculator observes that the current 3-months forward rate on Swiss francs is 20 = 1 franc, but he/she expects that the spot rate in 3 months will be 30 = 1 franc, then this speculator would now a. Buy dollars on the forward market B . Buy francs on the forward market c. Sell francs on the forward market d. Buy francs on the spot market and simultaneously sell francs on the 3-months forward market if the current spot rate is 25 = 1 franc 2. Which one of the following sets of exchange rates shows "cross-rate equality" (or "consistent cross rates")? a. 50 Indian rupees = \$1; \$2 = 1; 25 Indian rupees = 1 b. 1 Indian rupee = 1.5 Pakistani rupees; 50 Pakistani rupees = 1 Singapore dollar; 1 Singapore dollar = 75 Indian rupees C . 2 Swiss francs = \$1; 1 Swiss franc = € ; €1 = \$1.50 d. \$2 = 1; €1.5 = 1; €1 = \$0.75 3. In which of the following relationships between the expected future spot rate [E(e)] of a foreign currency and the current forward rate (efwd) of a foreign currency would a speculator have an incentive to sell foreign currency in the forward market? A . E(e) < efwd b. E(e) > efwd c. E(e) = efwd d. E(e) = (1/efwd) 20-1

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Chapter 20 - The Foreign Exchange Market 4. Other things equal, if exchange rates are flexible, and if U.S. consumers increase their demand for Japanese goods at the same time that Japanese consumers increase their demand for U.S. goods, then we would expect the dollar to A . Appreciate relative to the yen b. Depreciate relative to the yen c. Remain unchanged in value relative to the yen d. Appreciate, depreciate, or remain unchanged in value relative to the yen - impossible to determine without more information 5. In a setting of flexible exchange rates, suppose that the U.S. citizens decrease their import purchases from the United Kingdom at the same time that British citizens increase their purchases of stocks and bonds in the United States. The first action (the U.S. imports) by itself
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Chap020 - Chapter 20 The Foreign Exchange Market Chapter 20...

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