Currency Exchange Rates (CFA)

1. Suppose that the quote for British pounds (GBP) in New York is 1.3110 GBP:USD. What is the quote for U.S. dollars (USD) in London (USD:GBP)? A. 1.3110. B. 0.3110. C. 0.7628. 2. The annual interest rates in the United States (USD) and Sweden (SEK) are 4% and 7% per year, respectively. If the current spot rate is USD:SEK = 9.5238, then the 1-year forward rate in USD:SEK is: A. USD:SEK = 9.2568. B. USD:SEK = 10.2884. C. USD:SEK = 9.7985. 3. The annual risk-free interest rate is 10% in the United States (USD) and 4% in Switzerland (CHF), respectively, and the 1-year forward rate is CHF:USD = 0.80. If interest rate parity holds, todays CHF:USD spot rate must be: A. 0.8462. B. 0.7564. C. 0.8888. 4. The spot rate on the New Zealand dollar (NZD) is USD:NZD = 1.4286, and the 180-day forward rate is USD:NZD = 1.3889. If interest rate parity holds, this difference means: A. interest rates must be lower in the United States than in New Zealand. B. interest rates must be higher in the United States than in New Zealand. C. the NZD is expected to depreciate, and the dollar is expected to appreciate.

5. Todays spot rate for the Indonesian rupiah (IDR) is USD:IDR = 2,400, and the New Zealand dollar trades at USD:NZD = 1.60. The IDR:NZD cross rate is: A. IDR:NZD = 0.00067. B. IDR:NZD = 1,492.53. C. IDR:NZD = 3,840. 6. Todays spot NZD:USD ask exchange rate is 0.6010, and the bid is 0.6000. The percentage spread on the USD is: A. 0.6600%. B. 0.1664%. C. 6.0010%. 7. The NZD is trading at 0.3500 NZD:USD, and the SEK is trading at 0.3100 SEK:NZD. The SEK:USD cross rate is: A. 8.8573 SEK:USD. B. 9.2166 SEK:USD. C. 0.1085 SEK:USD. 8. Suppose that the quote for GBP in New York is 1.7574 1.7584 GBP:USD. The equivalent quote for U.S. dollars in London would be: A. USD:GBP 0.5687 0.5690. B. USD:GBP 0.5690 0.5687. C. GBP:USD 1.7584 1.7574. 9. The bid-ask quote for yen (JPY) in London (JPY:GBP) is 0.0050 0.00504. In New York, the bid-ask quote for British pounds (GBP:USD) is 1.671 1.678. What is the JPY:USD ask as a cross rate? A. 0.008390. B. 0.008457. C. 0.008422. Use the following information to answer Questions 10 and 11. CHF:USD spot rate = 0.8000 0.8100

CHF:USD 180-day forward rate = 0.8400 0.8500 USD:GBP spot rate = 0.5500 0.5600 USD:GBP 180-day forward rate = 0.5300 0.5400 10. Relative to the Swiss franc (CHF) and based on a 360-day year, the dollar is closest to trading at an annualized forward: A. premium of 10.38%. B. premium of 9.47%. C. discount of 9.47%. 11. What is the most appropriate characterization of the strength of the USD versus the Swiss franc and the pound? A. The USD is strong versus both currencies. B. The USD is weak versus both currencies. C. The USD is strong versus only one of the two currencies. 12. Suppose the spot rate is 0.7102 CHF:USD. Swiss and U.S. interest rates are 7.6% and 5.2%, respectively. If the 1-year forward rate is 0.7200 CHF:USD, an investor could: A. not earn arbitrage profits. B. earn arbitrage profits by investing in USD. C. earn arbitrage profits by investing in CHF. 13. The bid-ask quotes for the USD, GBP, and EUR are: USD:EUR: 0.7000 0.7010 GBP:USD: 1.7000 1.7010 GBP:EUR: 1.2000 1.2010 The potential arbitrage profits from triangular arbitrage based on an initial position of 1 million USD are closest to: A. 0 USD. B. 7,212 USD. C. 6,372 USD.

Foreign Exchange Parity Relations (CFA)

1. If the U.S. dollar was quoted at USD:AUD1.73 yesterday and today the U.S. dollar is trading at USD:AUD1.80, the U.S. dollar has: A. remained unchanged and the AUD has appreciated. B. depreciated and will purchase less Australian goods. C. appreciated and will purchase more Australian goods. 2. A countrys currency will depreciate if its: A. income is growing slowly relative to the rest of the world. B. inflation rate is lower than that of its trading partners. C. real interest rate is lower than real rates in other countries. 3. If there were an unexpected decline in the growth rate of the dollar money supply: A. real interest rates, output, and prices would fall, causing the dollar to depreciate. B. real interest rates would rise, causing an appreciation of the dollar. C. real interest rates, output, and prices would rise, causing the dollar to appreciate. 4. If the current account is in surplus, the sum of the financial account and official reserve transactions must be: A. in deficit. B. in surplus. C. equal to zero. 5. In a flexible exchange rate system, the value of a currency is determined by the: A. World Bank. B. countrys currency board.

C. supply and demand for the countrys currency in the foreign exchange markets. 6. Relative purchasing power parity: A. does not hold in the short run or the long run. B. tends to hold in the short run but not the long run. C. tends to hold in the long run but not the short run. 7. Assume that the current spot rate of exchange between the U.S. dollar and the euro is 1.2500 per USD. If the U.S. inflation rate is expected to be 5% and the inflation rate in Europe is expected to be 4%, the expected spot rate of exchange three years from today is closest to: A. 1.2864. B. 1.2146. C. 1.2381. 8.Suppose the exchange rate quote is $1.15 per euro, and expected inflation rates are 10% in the European Economic Community (EEC) and 8% in the United States. The end-of period exchange rate implied by PPP is closest to: A. $1.1291. B. $1.1270. C. $1.1710. 9. Which statement is most likely to be true if the forward rate is an unbiased predictor of the expected future spot rate? A. The market will not reward bearing foreign currency exposure. B. The foreign currency risk premium will be positive. C. Currencies will tend to trade at a forward premium. 10. Suppose the spot exchange rate quote is 0.7132 Canadian dollars (C$) per U.S. dollar. The 1-year nominal interest rate in Canada is 7.0% and the 1-year nominal interest rate in the United States is 5.0%. The expected exchange rate using the linear approximation of uncovered interest rate parity is closest to:

A. C$0.6896. B. C$0.6989. C. C$0.7275. 11. The spot exchange rate between the Danish kroner (DK) and the U.S. dollar (USD) is 6.812 DK per USD. The 6-month forward rate is 6.953 DK per USD. The expected change in the U.S. dollar exchange rate over the next six months is closest to: A. +2.1%. B. 1.4%. C. +1.4%. 12. The five international parity relationships indicate that the expected return on risk-free securities should be the same in all countries and exchange rate risk is really just inflation risk. Which of the following is least likely to be considered a practical implication from this framework? A. Investors will earn the same real rate of return on investments once their own currency impact is accounted for. B. Interest rate differentials reflect currency expectations. As a result, covered interest arbitrage will provide a return in any foreign currency that is equal to the domestic return. C. There are significant rewards for bearing foreign exchange risk. Use the information below to answer Questions 13 through 17. Sally Franklin, CFA, is a financial advisor to Jamie Curtess, a U.S. citizen interested in learning more about how her investments will be affected by exchange rates and differences in interest rates internationally. Franklin has gathered the following information based on Curtesss investment interests. The current spot exchange rate: $1 = 0.74. Europe United States Nominal 1-year interest rate: 0.04 ? Expected annual inflation: 0.02 0.01 Franklin also gathers the following information. Switzerland South Africa

Nominal 1-year interest rate: 0.05 0.07 Expected annual inflation: 0.03 0.05 13. According to the international Fisher relation, the 1-year nominal interest rate in the United States is closest to: A. 2.98%. B. 4.34%. C. 6.24%. 14. If the relative form of the PPP holds, the expected exchange rate in one year is closest to: A. $1.3381 per . B. $0.7463 per . C. $1.1650 per . 15. Use the answer from Question 13 to answer this question. If interest rate parity holds, the 1-year forward rate is closest to: A. $0.6772 per . B. $0.7463 per . C. $1.3381 per . 16. Curtess wonders how spot rates are expected to change in the future and asks the following question: What are the implications for the South African rand relative to the Swiss franc under uncovered interest rate parity, and the implications for the euro relative to the U.S. dollar under the relative form of purchasing power parity? Franklin responds by making two statements: Statement 1: I expect the South African rand to depreciate relative to the Swiss franc. Statement 2: I expect the euro to depreciate relative to the U.S. dollar. Based upon the underlying parity relationships cited, are Franklins Statements 1 and 2 accurate? A. No, both statements are inaccurate. B. Yes, both statements are accurate. C. One statement is accurate and one is inaccurate.

17. For this question only, assume the nominal interest rate in the United States is 3%. Real interest rates, using the linear approximation of the international Fisher relation, are most likely to be: A. greater in the United States than in Europe. B. lower in Europe than in South Africa. C. equal across all four countries.