mid2-sam

# 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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## This note was uploaded on 04/03/2012 for the course BUS 445 taught by Professor Lee during the Spring '11 term at Rhode Island.

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

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