DEPARTMENT OF ECONOMICS
February 10, 2015
1. You will have 90 minutes to complete the exam.
2. Check that your examination contains 36 questions.
3. Use a BLACK PENCIL to complete y
FX Market Mechanism by which participants
1. Transfer purchasing power between countries
2. Obtain or provide credit for international transactions
3. Minimize exposure of the risks of exchange rate changes
Rapidly changing due to:
Electronic trading pla
Balance of Payments Accounting
BOP is the statistical record of a countrys international transactions over a
certain period of time presented in form of double-entry bookkeeping
a countries BOP transactions of its citizens and government
E.X 100K of bi
INTRO to BOP
Classical Gold Standard 1875-1914
During this period in most major countries
1. Gold alone was assured of unrestricted coinage
2. Two- way convertibility between gold and national currencies at
3. Gold was freely imported/export
EXERCISEs for FX market
Around the horn. Assuming the following quotes, calculate how a market trader at Citibank with
$1,000,000 can make an intermarket arbitrage profit.:
Citibank quotes U.S. dollar per pound:
National Westminster quotes euros per p
International Parity Relationships and Forecasting Foreign Exchange Rates
Multiple Choice Questions
1. An arbitrage is best defined as
A. A legal condition imposed by the CFTC.
B. The act of simultaneously buying and selling the same or equival
Some fundamental questions managers of MNEs, international portfolio
investors, importers, exporters and government officials must deal with
every day are:
What are the determinants of exchange rates?
IRP _ second pass
Interest Rate Parity Defined
IRP is an arbitrage condition.
If IRP did not hold, then it would be possible
for an astute trader to make unlimited
amounts of money exploiting the arbitrage
Since we dont typically observe p
FX market second pass
The FOREX Market
Spot Rate Quotations
the U.S. dollar equivalent
e.g. a Japanese Yen is worth about a penny
the price of a U.S. dollar in the foreign currency
e.g. you get 100 yen to the
Balance of payments -1
Balance of Payments Accounting
The Balance of Payments is the statistical
record of a countrys international transactions
over a certain period of time presented in the
form of double-entry bookkeeping.
N.B. when we say a countrys
Classical Gold Standard:
During this period in most major countries:
Gold alone was assured of unrestricted coinage
There was two-way convertibility between gold
and national currencies at a stable ratio.
Gold could be freely exported
Functions of the Foreign Exchange Market
The foreign exchange market is the mechanism
by which participants:
transfer purchasing power between countries;
obtain or provide credit for international trade
minimize exposure to the risks
Examples of BOP transactions
BOP Transactions. Identify the correct BOP account for each of the following transactions.
a. A German-based pension fund buys U.S. government 30-year bonds for its investment portfolio.
Financial account: portfolio investment
The economic theories that link exchange rates, price levels, and interest rates
together are called international parity conditions
Not always true mistake is often not the theory but the interperation and
Prices and X Rate
ASSIGNMENT on Parity
Calculate the cross rate between the Mexican peso (Ps) and the euro
( ) from the following two spot rates: Ps12.45/$ and 0.7550/$.
Mexican peso, pesos/dollar (Ps/$)
European euro, euros/dollar (/$)
1. The world's largest foreign exchange trading center is:
A. New YorkB. TokyoC. LondonD. Hong Kong
2. The foreign exchange market closes: A. NeverB. 4:00
p.m. EST (New York time)C. 4:00 p.m. GMT (London time)
D. 4:00 p.m. (Tokyo time)
1. Interest Rate Parity (IRP) is best defined as: A. When a
government brings its domestic interest rate in line with
other major financial marketsB. When the central bank of a
country brings its domestic interest rate in line with its
1. A "foreign bond" issue is A. one denominated in a
particular currency but sold to investors in national capital
markets other than the country that issued the
denominating currencyB. one offered by a foreign borrower
to investors in a nat
1. The major feature that distinguishes international from
domestic banks is A. the type of deposits they acceptB. the
currency of denomination of the investments they make
C. a and bD. none of these
2. A country whose banking system is orga
Comparing "forward" and "futures" exchange contracts, we can say that:
A. they are both "marked-tomarket" daily
B. their major difference is in the way the underlying asset is priced for future
purchase or sale
C. a futures contract i
The term interest rate swaps
A. refers to a "single-currency interest rate swap" shortened to "interest
B. involves "counterparties" who make a contractual agreement to exchange cash
flows at periodic intervals
C. can be "
1. The international monetary system can be defined as the institutional framework
A. international payments are
B. movements of capital are
C. exchange rates among currencies are
D. all of
2. The interna
Whats international trade?
What's the international for the decade?
Whats the factor effect international trade?
The article was using the Apple as example. In 2007, Apple has deve
Name: Zhishen Deng
Hows politic improve the economic?
What kind of politics are common in economic integration?
Whats the benefit for economic integration?
Does economic union is really good for countries?
Whats other factor that
Class exercise 1
Answers done in class not posted or
given over email.
Explain how each of the following transactions will be classified and
recorded in the debit and credit of the Canadian Balance of Payments
a. A Japanese insurance company purchases Go
You are a U.S.-based treasurer with $1,000,000
to invest. The dollar-euro exchange rate is
quoted as $1.20 = 1.00 and the dollar-pound
exchange rate is quoted at $1.80 = 1.00.
If a bank quotes you a cross rate of 1.00 =
1.50 how much m
Class exercise Parity conditions
Foreign exchange trader at J.P. Morgan
Chase, can invest $5 million, or the foreign
currency equivalent of the bank's short term
funds, in a covered interest arbitrage with
Using the following quotes can c