International Finance Test 2

Which statement best distinguishes hedging from currency speculation?

Hedging reduces an existing currency exposure, while speculation takes currency risk to profit from an expected movement.

A U.S investor expects the Japanese yen to appreciate against the dollar. which position is consistent with that forecast?

Borrow dollars, buy yen, and invest the yen

For a short foreign-currency position established by borrowing foreign currency, profit requires the ending foreign-currency price to be:

Below the break even rate

You expect a foreign currency to depreciate against your home currency. which strategy should you use to take a larger position than your own funds would allow.

borrow foreign currency, sell it, and invest the home currency received

what does it mean to sell euros forward?

agree today to sell euros at a stated future date and rate.

which policy is fiscal policy rather than monetary policy?

changing government spending or taxes

the fed sells euros to a commercial bank and receives payment by debiting the banks dollar reserve account. In the market for euros, what occurs, other things equal?

The supply rises and USD/EUR falls

After purchasing foreign currency, the fed wants to sterilize the resulting increase in dollar bank reserves. It should:

sell treasury securities

A country pegs its currency to the U.S dollar. The dollar depreciates against the euro while the peg is maintained. The country’s currency will most likely:

depreciate against the euro

Compared with a floating rate, a fixed rate can transmit foreign inflation more strongly because:

the domestic currency cannot appreciate to offset rising foreign currency prices of imported goods

Locational arbitrage is feasible when:

one dealers bid exceeds another available dealers ask

Under IRP, a foreign currency with a lower interest rate than the home currency should have:

a forward premium

which development makes PPP less likely to hold?

trade barriers and buyers with few substitutes

Which statement correctly distinguishes the three parity relationships

IRP prices a forward contract; PPP uses inflation and IFE uses interest

The spot rate imply a cross rate of 2.50 NZD/GBP, but the quoted cross rate is 2.40 NZD/GBP. Ignoring bid-ask spreads, which triangular-arbitrage route is profitable?

SD → NZD → GBP → USD