Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.

1) The international monetary system went through several distinct stages of evolution. These 1)
stages are summarized, in alphabetic order, as follows:

(i) Bimetallism
(ii) Bretton Woods system
(iii) Classical gold standard
(iv) Flexible exchange rate regime
(v) Interwar period

The chronological order that they actually occurred is:

A) (i), (iii), (v), (ii), and (iv) B) (vi), (i), (iii), (ii), and (v)
C) (iii), (i), (iv), (ii), and (v) D) (v), (ii), (i), (iii), and (iv)

2) Gresham's Law states that 2)

A) good money drives bad money out of circulation.
B) bad money drives good money out of circulation.
C) if a country bases its currency on both gold and silver, at an official exchange rate,
it will be the more valuable of the two metals that circulate.
D) none of the options.

3) Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to 3)
gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current
market exchange rate is $1.80 per pound, how would you take advantage of this
situation? Hint: assume that you have $350 available for investment.
A) Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the
gold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of
$1.80 per pound to get $360.
B) Start with $350. Exchange the dollars for pounds at the current rate of $1.80 per
pound. Buy gold with pounds at £20 per ounce. Convert the gold to dollars at $35
per ounce.
C) both of the options
D) none of the options

1
4) Prior to the 1870s, both gold and silver were used as international means of payment 4)
and the exchange rates among currencies were determined by either their gold or silver
contents. Suppose that the dollar was pegged to gold at $30 per ounce, the French franc
is pegged to gold at 90 francs per ounce and to silver at 9 francs per ounce of silver, and
the German mark pegged to silver at 1 mark per ounce of silver. What would the
exchange rate between the U.S. dollar and German mark be under this system?
A) 1 German mark = $2 B) 1 German mark = $1
C) 1 German mark = $3 D) 1 German mark = $0.50

5) Suppose that both gold and silver are used as international means of payment and the 5)
exchange rates among currencies are determined by either their gold or silver contents.
Suppose that the dollar was pegged to gold at $20 per ounce, the Japanese yen is pegged
to gold at 120,000 yen per ounce and to silver at 8,000 yen per ounce of silver, and the
Australian dollar is pegged to silver at $5 per ounce of silver. What would the exchange
rate between the U.S. dollar and Australian dollar be under this system?
A) $1 U.S. = $1 Australian B) $1 U.S. = $3.75 Australian
C) $1 U.S. = $2 Australian D) none of the options

6) Suppose that Britain pegs the pound to gold at six pounds per ounce, whereas the 6)
exchange rate between pounds and U.S. dollars is $5 = £1. What would an ounce of
gold be worth in U.S. dollars?
A) $0.83 B) $29.40 C) $1.20 D) $30.00

7) Special Drawing Rights (SDR) are 7)

A) used in addition to gold and foreign exchanges, to make international payments.
B) a "portfolio" of currencies, and its value tends to be more stable than the
currencies that it is comprised of.
C) an artificial international reserve allotted to the members of the International
Monetary Fund (IMF), who can then use it for transactions among themselves or
with the IMF.
D) All of these choices are correct.

8) Under a flexible exchange rate regime, governments can retain monetary policy 8)
independence because the external balance will be achieved by
A) the Triffin paradox. B) the exchange rate adjustments.
C) the price-specie flow mechanism. D) none of the options

9) The advent of the euro marks the first time that sovereign countries have voluntarily 9)
given up their
A) national borders to foster economic integration.
B) fiscal policy independence to foster economic integration.
C) monetary independence to foster economic integration.
D) national debt to foster economic integration.

2
10) Benefits from adopting a common European currency include 10)
A) elimination of exchange rate risk.
B) reduced transaction costs.
C) increased price transparency, which promotes Europe-wide competition.
D) all of the options

11) Monetary policy for the countries using the euro as a currency is now conducted by 11)
A) European Central Bank. B) the Bundesbank.
C) the Federal Reserve. D) none of the options

12) In the EU, there is a 12)

A) low degree of fiscal integration among EU countries.
B) high degree of fiscal integration among EU countries.

13) Advantages of a flexible exchange rate include which of the following? 13)
A) The government can use monetary and fiscal policies to pursue whatever
economic goals it chooses.
B) National policy autonomy.
C) Easier external adjustments.
D) all of the options

14) Advantages of a fixed exchange rate include 14)

A) reduction in transactions costs.
B) reduction in trading frictions.
C) reduction in exchange rate risk for businesses.
D) all of the options

3
15) Consider the supply-demand framework for the British pound relative to the U.S. dollar 15)
shown in the following chart. The exchange rate is currently $1.80 = £1.00. Which of
the following is correct?

A) At an exchange rate of $1.80 = £1.00, demand for British pounds exceeds supply.
B) At an exchange rate of $1.80 = £1.00, demand for British pounds exceeds supply.
Additionally, under a flexible exchange rate regime, the U.S. dollar will depreciate
to an exchange rate of $1.90 = £1.00.
C) Under a flexible exchange rate regime, the U.S. dollar will depreciate to an
exchange rate of $1.90 = £1.00.
D) At an exchange rate of $1.80 = £1.00, supply for British pounds exceeds demand.

4
16) Consider the supply-demand framework for the British pound relative to the U.S. dollar 16)
shown in the following chart. The exchange rate is currently $1.80 = £1.00. Which of
the following is correct?

A) To "fix" the exchange rate at $1.80 = £1.00, the U.S. government could use
contractionary fiscal policy to shift the demand curve to the left.
B) The British Government could use fiscal or monetary policy to shift the supply
curve to the right to fix the exchange rate to $1.80 = £1.00.
C) To "fix" the exchange rate at $1.80 = £1.00, the Federal Reserve could use
contractionary monetary policy to shift the demand curve to the left.
D) all of the options

17) If the United States imports more than it exports, then 17)
A) the supply of dollars is likely to exceed the demand in the foreign exchange
market, ceteris paribus, and one can infer that the U.S. dollar would be under
pressure to depreciate against other currencies.
B) one can infer that the U.S. dollar would be under pressure to depreciate against
other currencies.
C) the supply of dollars is likely to exceed the demand in the foreign exchange
market, ceteris paribus.
D) none of the options

5
18) Credit entries in the U.S. balance of payments 18)
A) give rise to the supply of dollars.
B) result from foreign sales of U.S. goods and services, goodwill, financial claims,
and real assets, and give rise to the demand for dollars.
C) result from foreign sales of U.S. goods and services, goodwill, financial claims,
and real assets.
D) result from U.S. purchases of foreign goods and services, goodwill, financial
claims, and real assets.
E) give rise to the demand for dollars.

19) The "J-curve effect" shows 19)

A) the initial improvement and the eventual depreciation of a country's trade balance
following a currency depreciation.
B) the trade balance's lack of responsiveness to the exchanges rate changes.
C) the initial deterioration and the eventual improvement of a country's trade balance
following a currency depreciation.
D) none of the options

20) When a country's currency depreciates against the currencies of major trading partners, 20)
A) the country's exports tend to rise and imports rise.
B) the country's exports tend to fall and imports fall.
C) the country's exports tend to rise and imports fall.
D) the country's exports tend to fall and imports rise.

21) What is the correct label for the vertical axis in the J-curve? 21)

A) Size of Merchandise Trade Balance B) Size of Trade Balance

C) Time D) Change in the Trade Balance

6
22) Most interbank trades are 22)
A) speculative or arbitrage transactions.
B) overnight loans from one bank to another.
C) brokered by dealers.
D) simple order processing for the retail client.

23) The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A's 23)
correspondent account(s) with Bank B if a currency trader employed at Bank A buys
£45,000 from a currency trader at Bank B for $90,000 using its correspondent
relationship with Bank B.
A) Bank A's pound-denominated account at B will rise by £45,000.
B) Bank B's pound-denominated account at A will rise by £45,000.
C) Bank A's dollar-denominated account at B will rise by $90,000.
D) Bank B's dollar-denominated account at A will fall by $90,000.

24) Suppose you observe the following exchange rates: €1 = $1.25; £1 = $2.00. Calculate 24)
the euro-pound crossrate.
A) £2.50 = €1 B) £1 = €0.625 C) £1 = €2.50 D) £1 = €1.60

25) The AUD/$ spot exchange rate is AUD1.60/$ and the SF/$ is SF1.25/$. The AUD/SF 25)
cross exchange rate is ________.
A) 1.2800 B) 0.7813 C) 2.0000 D) 0.3500

26) Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as 26)
$1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00.
A) £1.25/€1.00 B) €1.25/£1.00 C) $1.25/£1.00 D) €0.80/£1.00

27) Suppose you observe the following exchange rates: €1 = $.85; £1 = $1.60; and €2.00 = 27)
£1.00. Starting with $1,000,000, how can you make money?
A) Start with dollars, exchange for euros at €1 = $.85; exchange for pounds at €2.00
= £1.00; exchange for dollars at £1 = $1.60.
B) Exchange $1m for £625,000 at £1 = $1.60. Buy €1,250,000 at €2 = £1.00; trade
for $1,062,500 at €1 = $.85.
C) Start with euros; exchange for pounds; exchange for dollars; exchange for euros.
D) No arbitrage profit is possible.

28) You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate 28)
is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 =
£1.00. If a bank quotes you a cross rate of £1.00 = €1.20 how can you make money?
A) No arbitrage is possible
B) Buy £ $2/£, buy € at €1.20/£, sell € at $1.60/€
C) Buy euro at $1.60/€, buy £ at €1.20/£, sell £ at $2/£
D) none of the options

7
29) You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate 29)
is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 =
£1.00. If a bank quotes you a cross rate of £1.00 = €1.20 how much money can an astute
trader make?
A) $1,160,000 B) $40,000
C) No arbitrage is possible D) $41,667

30) You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate 30)
is quoted as $1.50 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 =
£1.00. If a bank quotes you a cross rate of £1.00 = €1.25 how can you make money?
A) Buy £ $2/£, buy € at €1.25/£, sell € at $1.50/€.
B) Buy euro at $1.50/€, buy £ at €1.25/£, sell £ at $2/£.
C) No arbitrage is possible.
D) none of the options

31) The Singapore dollar—U.S. dollar (S$/$) spot exchange rate is S$1.60/$, the Canadian 31)
dollar—U.S. dollar (CD/$) spot rate is CD1.33/$ and the S$/CD1.15. Determine the
triangular arbitrage profit that is possible if you have $1,000,000.
A) $44,063 profit B) $46,093 profit
C) No profit is possible D) $46,093 loss

32) The forward market 32)

A) involves contracting today for the right but not obligation to the future purchase of
sale of foreign exchange at a price agreed upon today.
B) involves contracting today for the future purchase of sale of foreign exchange at
the spot rate that will prevail at the maturity of the contract.
C) involves contracting today for the future purchase of sale of foreign exchange at a
price agreed upon today.
D) none of the options

33) The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. 33)
You enter into a short position on €1,000. At maturity, the spot exchange rate is $1.60/
€. How much have you made or lost?
A) Lost $50 B) Made €100 C) Lost $100 D) Made $150

34) The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. 34)
Based on your analysis of the exchange rate, you are confident that the spot exchange
rate will be $1.52/€ in three months. Assume that you would like to buy or sell
€1,000,000. What actions do you need to take to speculate in the forward market?
A) Sell euro today at the spot rate, buy them forward.
B) Take a short position in a forward contract on €1,000,000 at $1.50/€.
C) Buy euro today at the spot rate, sell them forward.
D) Take a long position in a forward contract on €1,000,000 at $1.50/€.

8
35) When a currency trades at a premium in the forward market 35)
A) the forward rate is more than the spot rate.
B) the exchange rate is less than one dollar.
C) the exchange rate is more than one dollar (e.g., €1.00 = $1.28).
D) the forward rate is less than the spot rate.

36) The SF/$ spot exchange rate is SF1.25/$ and the 180 day forward exchange rate is 36)
SF1.30/$. The forward premium (discount) is
A) the dollar trading at a 4% discount to the Swiss franc for delivery in 180 days.
B) the dollar trading at an 8% premium to the Swiss franc for delivery in 180 days.
C) the dollar trading at a 4% premium to the Swiss franc for delivery in 180 days.
D) the dollar trading at an 8% discount to the Swiss franc for delivery in 180 days.

37) The €/$ spot exchange rate is $1.50/€ and the 120 day forward exchange rate is 1.45/€. 37)
The forward premium (discount) is
A) the dollar trading at a 5% premium to the Swiss franc for delivery in 120 days.
B) the dollar trading at a 10% discount to the euro for delivery in 120 days.
C) the dollar trading at a 5% discount to the euro for delivery in 120 days.
D) the dollar trading at an 8% premium to the euro for delivery in 120 days.

38) Suppose you observe a spot exchange rate of $1.0500/€. If interest rates are 5% APR in 38)
the U.S. and 3% APR in the euro zone, what is the no-arbitrage 1-year forward rate?
A) €1.0300/$ B) €1.0704/$ C) $1.0704/€ D) $1.0300/€

39) Suppose you observe a spot exchange rate of $1.0500/€. If interest rates are 3 percent 39)
APR in the U.S. and 5 percent APR in the euro zone, what is the no-arbitrage 1-year
forward rate?
A) $1.0704/€ B) $1.0300/€ C) €1.0704/$ D) €1.0300/$

40) Suppose that the one-year interest rate is 5.0 percent in the United States; the spot 40)
exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€. What must
the one-year interest rate be in the euro zone to avoid arbitrage?
A) 8.62% B) 6.09%
C) 5.0% D) none of the options

41) Suppose that the one-year interest rate is 4.0 percent in Italy, the spot exchange rate is 41)
$1.60/€, and the one-year forward exchange rate is $1.58/€. What must the one-year
interest rate be in the United States?
A) 2.7% B) 5.32%
C) 2% D) none of the options

9
42) Suppose that you are the treasurer of IBM with an extra U.S. $1,000,000 to invest for 42)
six months. You are considering the purchase of U.S. T-bills that yield 1.810 percent
(that's a six month rate, not an annual rate by the way) and have a maturity of 26 weeks.
The spot exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110.
The interest rate in Japan (on an investment of comparable risk) is 13 percent. What is
your strategy?
A) Take $1m, translate into yen at the forward rate, invest in Japan, hedge with a
short position in the spot contract.
B) Take $1m, translate into yen at the spot, invest in Japan, and repatriate your yen
earnings back into dollars at the spot rate prevailing in six months.
C) Take $1m, translate into yen at the spot, invest in Japan, hedge with a short
position in the forward contract.
D) Take $1m, invest in U.S. T-bills.

43) Suppose that the annual interest rate is 2.0 percent in the United States and 4 percent in 43)
Germany, and that the spot exchange rate is $1.60/€ and the forward exchange rate,
with one-year maturity, is $1.58/€. Assume that an arbitrager can borrow up to
$1,000,000 or €625,000. If an astute trader finds an arbitrage, what is the net cash flow
in one year?
A) $46,207 B) $14,000 C) $7,000 D) $238.65

44) Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent 44)
in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate,
with one-year maturity, is $1.16/€. Assume that an arbitrager can borrow up to
$1,000,000. If an astute trader finds an arbitrage, what is the net cash flow in one year?
A) $10,690 B) $15,000 C) $21,964.29 D) $46,207

45) As of today, the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected 45)
to prevail for the next year in the U.S. is 2 percent and 3 percent in the euro zone. What
is the one-year forward rate that should prevail?
A) €1.00 = $0.9903 B) €1.00 = $1.2623
C) €1.00 = $1.2379 D) $1.00 = €1.2623

46) The International Fisher Effect suggests that 46)

A) an increase (decrease) in the expected inflation rate in a country will cause a
proportionate increase (decrease) in the interest rate in the country.
B) any forward premium or discount is equal to the expected change in the exchange
rate.
C) the nominal interest rate differential reflects the expected change in the exchange
rate.
D) any forward premium or discount is equal to the actual change in the exchange
rate.

10
47) The main approaches to forecasting exchange rates are 47)
A) Efficient market, Fundamental, and Technical approaches.
B) Efficient market and Technical approaches.
C) Fundamental and Technical approaches.
D) Efficient market and Fundamental approaches.

48) A U.S.-based multinational bank 48)

A) would have to provide deposit insurance but not meet reserve requirements on
foreign currency deposits.
B) would not have to provide deposit insurance but would have to meet reserve
requirements on foreign currency deposits.
C) would have to provide deposit insurance and meet reserve requirements on foreign
currency deposits.
D) would not have to provide deposit insurance and meet reserve requirements on
foreign currency deposits.

49) A bank may establish a multinational operation for the reason of regulatory advantage. 49)
The underlying rationale being that
A) by maintaining foreign branches and foreign currency balances, banks may reduce
transaction costs and foreign exchange risk on currency conversion if government
controls can be circumvented.
B) banks follow their multinational customers abroad to prevent the erosion of their
clientele to foreign banks seeking to service the multinational's foreign
subsidiaries.
C) multinational banking operations help a bank prevent the erosion of its traveler's
check, tourist, and foreign business markets from foreign bank competition.
D) multinational banks are often not subject to the same regulations as domestic
banks. There may be reduced need to publish adequate financial information, lack
of required deposit insurance and reserve requirements on foreign currency
deposits, and the absence of territorial restrictions.

50) Both subsidiary and affiliate banks 50)

A) operate under the banking laws of the country in which they are incorporated.
B) operate under the banking laws of the U.S.
C) operate under the banking laws of the country in which they are incorporated, as
well as the banking laws of the U.S.
D) can underwrite securities, but not accept dollar-denominated deposits.

51) Offshore banks 51)

A) operate as branches or subsidiaries of the parent bank.
B) are frequently located on old oil drilling platforms located in international waters.
C) are often located in "pariah" countries like North Korea and Iran.
D) none of the options

11
52) Which banks cannot accept foreign deposits? 52)
A) Subsidiary banks located overseas B) Domestic banks located in the U.S.
C) Edge Act banks located in the U.S. D) Foreign branches located overseas

53) Eurocurrency 53)

A) is a demand deposit of money in an international bank located in a county
different from the country that issued the currency.
B) is the euro, the common currency of Europe.
C) is a time deposit of money in an international bank located in a county different
from the country that issued the currency.
D) is either a time deposit of money in an international bank located in a county
different from the country that issued the currency or a demand deposit of money
in an international bank located in a county different from the country that issued
the currency.

54) The Eurocurrency market 54)

A) is only in Europe.
B) has languished following monetary union in Europe.
C) is an external banking system that runs parallel to the domestic banking system of
the country that issued the currency.
D) none of the options

55) In an FRA, the buyer agrees to pay the seller 55)

A) the increased interest cost if interest rates increase above the agreement rate.
B) the increased interest cost on a notional amount if interest rates fall below an
agreement rate.
C) the increased interest cost on a notional amount if interest rates rise above an
agreement rate.
D) none of the options

56) ABC International has borrowed $4,000,000 at LIBOR plus a lending margin of .65 56)
percent per annum on a three-month rollover basis from Barclays in London. Three
month LIBOR is currently 5.5 percent, but ABC is worried about an increase in
three-month LIBOR 3 months from now. What could they do to hedge?
A) Buy a 3 × 6 FRA in the amount of $4 million.
B) Buy a 3 × 3 FRA in the amount of $4 million.
C) Sell a 3 × 6 FRA in the amount of $4 million.
D) Buy a 3 × 9 FRA in the amount of $4 million.

12
57) You entered in to a 3 × 6 forward rate agreement that obliged you to borrow 57)
$10,000,000 at 3 percent. Suppose at the maturity of the FRA, the correct interest rate is
3.5 percent. Clearly you are better off since you have the ability to borrow $10,000,000
for 3 months at 3 percent instead of 3.5 percent. What is the payoff at the maturity of
the FRA?
A) Net payment of $50,000 to you B) Net payment of $12,391.57 to you
C) Net payment of $48,309.18 to you D) Net payment of $12,500 to you

58) A "foreign bond" issue is 58)

A) one denominated in a particular currency but sold to investors in national capital
markets other than the country that issued the denominating currency.
B) one offered by a foreign borrower to investors in a national market and
denominated in that nation's currency (e.g., a German MNC issuing
dollar-denominated bonds to U.S. investors).
C) for example, a German MNC issuing dollar-denominated bonds to U.S. investors.
D) one offered by a foreign borrower to investors in a national market and
denominated in that nation's currency.

59) A "Eurobond" issue is 59)

A) one denominated in a particular currency but sold to investors in national capital
markets other than the country that issued the denominating currency.
B) for example, a Dutch borrower issuing dollar-denominated bonds to investors in
the U.K., Switzerland, and the Netherlands.
C) usually a bearer bond.
D) all of the options

60) "Yankee" bonds are 60)

A) yen-denominated foreign bonds originally sold in Japan.
B) dollar-denominated foreign bonds originally sold to U.S. investors.
C) pound sterling-denominated foreign bonds originally sold in the U.K.
D) none of the options

61) "Bulldog" bonds are 61)

A) yen-denominated foreign bonds originally sold in Japan.
B) dollar-denominated foreign bonds originally sold to U.S. investors.
C) pound sterling-denominated foreign bonds originally sold in the U.K.
D) none of the options

62) U.S. security regulations require Yankee bonds and U.S. corporate bonds sold to U.S. 62)
citizens to be
A) registered bonds. B) bearer bonds.
C) municipal bonds. D) none of the options

13
63) Investors will generally accept a lower yield on ________ than on ________ of 63)
comparable terms, making them a less costly source of funds for the issuer to service.
A) registered bonds; bearer bonds B) bearer bonds; registered bonds
C) Eurobonds; domestic bonds D) domestic bonds; Eurobonds

64) A global bond issue denominated in U.S. dollars and issued by U.S. corporations 64)
A) trade as domestic bonds in the U.S. domestic market.
B) trade as Eurobonds overseas and trade as domestic bonds in the U.S. domestic
market.
C) trade as Eurobonds overseas.
D) none of the options

65) Floating-rate notes (FRN) 65)

A) are typically medium-term bonds with coupon payments indexed to some
reference rate (e.g., LIBOR), and appeal to investors with strong need to preserve
the principal value of the investment should they need to liquidate prior to the
maturity of the bonds.
B) are typically medium-term bonds with coupon payments indexed to some
reference rate (e.g., LIBOR).
C) appeal to investors with strong need to preserve the principal value of the
investment should they need to liquidate prior to the maturity of the bonds.
D) experience very volatile price changes between reset dates.

14
Answer Key
Testname: IFN1

1) A
2) B
3) A
4) C
5) B
6) D
7) D
8) B
9) C
10) D
11) A
12) A
13) D
14) D
15) B
16) D
17) A
18) B
19) C
20) C
21) D
22) A
23) A
24) D
25) A
26) B
27) B
28) C
29) D
30) B
31) B
32) C
33) C
34) D
35) A
36) B
37) B
38) C
39) B
40) A
41) A
42) C
15
Answer Key
Testname: IFN1

43) C
44) C
45) C
46) C
47) A
48) D
49) D
50) A
51) A
52) B
53) C
54) C
55) B
56) A
57) B
58) B
59) D
60) B
61) C
62) A
63) B
64) B
65) A

16