mid2-sam - Multinational Financial Management Spring, 2012...

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Multinational Financial Management Spring, 2012 Sample Mid term 2 1. When Interest Rate Parity (IRP) does not hold (a) there is usually a high degree of inflation in at least one country (b) the financial markets are in equilibrium (c) there are opportunities for covered interest arbitrage (d) Forward rate is a biased predictor of the future spot rate Answer: c) 2. Forward expectation purchasing power parity (FEPPP) can be approximated as (a) E ( e ) [ F ($ / £ ) - S ($ / £ )] /S ($ / £ ) (b) [ F ($ / £ ) - S ($ / £ )] /S ($ / £ ) π $ - π £ (c) π $ - π £ i $ - i £ (d) [ F ($ / £ ) - S ($ / £ )] /S ($ / £ ) π £ - π $ Answer: (b) 3. Suppose that you have an extra US$1,000,000 to invest for six months. You are consid- ering the purchase of U.S. T-bills that yield 2% (that’s a six month rate, not an annual rate) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = U 100, and you believe that in six months the spot rate will be $1.00 = U 110. What must be the
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mid2-sam - Multinational Financial Management Spring, 2012...

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