3. If it was determined that the movement of exchange rates was not related to p

Question

3. If it was determined that the movement of exchange rates was not related to previous exchange rate values, this implies that a ____ is not valuable for speculating on expected exchange rate movements.
a. technical forecast technique

b. fundamental forecast technique c. all of the above
d. none of the above

4. Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the Mexican five-year interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.20. What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is used as a forecast?

a. $.131. b. $.226. c. $.262. d. $.140. e. $.174.

5. Assume that the U.S. interest rate is 11 percent, while Australia's one-year interest rate is 12 percent. Assume interest rate parity holds. If the one-year forward rate of the Australian dollar was used to forecast the future spot rate, the forecast would reflect an expectation of:
a. depreciation in the Australian dollar's value over the next year.

b. appreciation in the Australian dollar's value over the next year.
c. no change in the Australian dollar's value over the next year.
d. Information on future interest rates is needed to answer this question.

6. The following regression model was estimated to forecast the value of the Indian rupee (INR):
INRt = a0 + a1INTt + a2INFt-1 + mut,
where INR is the quarterly change in the rupee, INT is the real interest rate differential in period t between the U.S. and India, and INF is the inflation rate differential between the U.S. and India in the previous period. Regression results indicate coefficients of a0 = .003; a1 = .5; and a2 = .8. Assume that INFt-1 = 2%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution:

Probability Possible Outcome

30% 2% 40% 3% 30% 4%

The expected change in the Indian rupee in period t is: a. 3.40%.
b. 0.40%.
c. 3.10%.

d. 1.70%.
e. none of the above

7. Transaction exposure reflects:
a. the exposure of a firm's international contractual transactions to exchange rate

fluctuations.
b. the exposure of a firm's local currency value to transactions between foreign

exchange traders.
c. the exposure of a firm's financial statements to exchange rate fluctuations. d. the exposure of a firm's cash flows to exchange rate fluctuations.

8. Which of the following operations benefits from appreciation of the firm's local currency?
a. borrowing in a foreign currency and converting the funds to the local currency

prior to the appreciation.

receiving earnings dividends from foreign subsidiaries.

purchasing supplies locally rather than overseas.

exporting to foreign countries.

9. Economic exposure can affect: a. MNCs only.
b. purely domestic firms only.
c. AandB

d. none of the above

10. Assume that the British pound and Swiss franc are highly correlated. A U.S. firm anticipates the equivalent of $1 million cash outflows in francs and the equivalent of $1 million cash outflows in pounds. During a ____ cycle, the firm is ____ affected by its exposure.

a. strong dollar; favorably b. weak dollar; not
c. strong dollar; not
d. weak dollar; favorably

Explanation / Answer

3. a. technical forecast technique

4. (1.05)5/(1.08)5 1 = 13%; $.20[1 + ( 13%)] = $.174

5.a. depreciation in the Australian dollar's value over the next year.

7. a.the exposure of a firm's international contractual transactions to exchange rate

fluctuations.

8. a. borrowing in a foreign currency and converting the funds to the local currency

prior to the appreciation.

9. c. AandB

10. a. strong dollar; favorably

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