Multiple Choice

Identify the choice that best completes the statement or answers the question.
C
The value of the Australian dollar (A$) today is 0.41. Yesterday, the value of the
1. Australian dollar was 0.38. The Australian dollar by _______%.
a. depreciated; 7.90
c. appreciated; 7.90
b.
depreciated;
7.30
d. appreciated; 7.30
Chapter 4
A
An increase in UK interest rates relative to euro interest rates is likely to
2. ________ the UK demand for euros and _________ the supply of euros for sale.
a. reduce; increase
c. reduce; reduce
b. increase; reduce
d. increase; increase
B
In general, when speculating on exchange rate movements, the speculator will
3. borrow the currency that is expected to appreciate and invest in the country
whose currency is expected to depreciate.
a. true.
b. false.
A
Assume the following information regarding UK and European annualized
4. interest rates:

Currency
Lending Rate
Borrowing Rate
UK pound ()
6.73%
7.20%
Euro ()
6.80%
7.28%
Milly Bank can borrow either 20 million or 20 million. The current spot rate of
the euro is 0.75. Furthermore, Milly Bank expects the spot rate of the euro to be
0.76 in 90 days. What is Milly Banks pound profit from speculating if the spot
rate of the euro is indeed 0.76 in 90 days?
a. 251,200
b. 251,386
c. 541,324
d. 561,813
e. 502,713
The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72
5. per pound:
a. U.S. demand for pounds would exceed the supply of pounds for sale and
there would be a shortage of pounds in the foreign exchange market.
b. U.S. demand for pounds would be less than the supply of pounds for sale
and there would be a shortage of pounds in the foreign exchange market.
c. U.S. demand for pounds would exceed the supply of pounds for sale and
there would be a surplus of pounds in the foreign exchange market.
d. U.S. demand for pounds would be less than the supply of pounds for sale
and there would be a surplus of pounds in the foreign exchange market.
e. U.S. demand for pounds would be equal to the supply of pounds for sale
and there would be a shortage of pounds in the foreign exchange market.
If inflation in New Zealand suddenly increased while euro area inflation stayed
6. the same, there would be:
a. an inward shift in the demand schedule for NZ$ and an outward shift in
the supply schedule for NZ$.
b. an outward shift in the demand schedule for NZ$ and an inward shift in
the supply schedule for NZ$.
c. an outward shift in the demand schedule for NZ$ and an outward shift in
the supply schedule for NZ$.
d. an inward shift in the demand schedule for NZ$ and an inward shift in the
supply schedule for NZ$.
The exchange rates of smaller countries are very stable because the market for
7. their currency is very liquid.
a. true.
b. false.
Any event that reduces the euro area demand for Japanese yen should result in

1
5
C

(0.41 - 0.38)/0.38 = 7.90%

1.

Borrow 20 million.

2.

Convert the 20 million to 20,000,000 / 0.75 = :26,666,667.

3.

Invest the :26,666,667 at an annualized rate of 6.80% for 90 days.

26,315,789 x [1 + 6.80% (90/360)]
= :27,120,000

4.

Determine pounds owed: 20,000,000 x [1 + 7.20% (90/360)] = 20,360,000.

5.

Determine euros needed to repay pound loan: 20,360,000 / 0.76 = :26,789,474.

6.
251,200.

The euro profit is 27,120,000 - 26,789,474 = 330,526 or 330,526 x 0.76 =