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1INTERNATIONALFINANCEAssignmentProblems(5)Name:Student#:I.Choosethecorrectanswerforthefollowingquestions(onlyONEcorrectanswer)(3creditsforeachquestion,totalcredits3x20=60)1.Whenthesupplyofanddemandforaforeignexchangeintheforeignexchangemarketareexactlythesame,theexchangerateisthe__________.A.realexchangerateB.effectiveexchangerateC.equilibriumexchangerateD.crossexchangerate2.AnincreaseinthedemandforFrenchgoodsandserviceswill__________.A.inducearightwardshiftinthedemandforeuroB.inducealeftwardshiftinthedemandforeuroC.resultinarightwardmovementalongthedemandcurveforeuroD.resultinaleftwardmovementalongthedemandcurveforeuro3.IfU.S.demandforJapanesegoodsincreasesandJapan’sdemandforU.S.productsalsorisesatthesametime,whichofthefollowingcanyouconcludeinthissituation?A.TheU.S.dollarwillappreciateagainsttheyen.B.TheU.S.dollarwilldepreciateagainsttheyen.C.TheU.S.dollarwillnotchangerelativetotheyen.D.TheU.S.dollarmayappreciate,depreciate,orremainunchangedagainsttheyen.4.IfthepriceofapairofNikesneakerscosts$85inU.S,andthepriceofthesamesneakersis€80inParis,thespotrateis$1.35pereuro,theeuro__________.A.iscorrectlyvaluedaccordingtoPPPB.iscorrectlyvaluedaccordingtorelativePPPC.isundervaluedaccordingtoPPPD.isovervaluedaccordingtoPPP5.IftheexpectedexchangerateE(SB/A)accordingtotherelativepurchasingpowerparityislowerthanthespotexchangerate(SB/A),wemayconcludethat__________.A.countryBisexpectedtorunhugeBOPsurpluswithcountryAB.countryA’sinterestrateisgoingtobelowerthanthatofcountryB’sC.theexpectedinflationrateincountryAishigherthantheexpectedinflationrateincountryBD.theexpectedinflationrateincountryAislowerthantheexpectedinflationrateincountryB6.AssumethatPPPholdsinthelongrun.Ifthepriceofatradablegoodis$20inthe2U.S.and100pesosinMexico;andtheexchangerateis7pesos/$rightnow,whichofthefollowingchangesmightweexpectinthefuture?A.anincreaseinthepriceofthegoodintheU.SB.adecreaseinthepriceofthegoodinMexicoC.anappreciationofthepesoinnominaltermsD.adepreciationofthepesoinnominalterms7.Whichbasketofgoodswouldbemostlikelytoexhibitabsolutepurchasingpowerparity?A.Highlytradablecommodities,suchaswheatB.ThegoodsintheConsumerPriceindexC.Specializedluxurygoods,whicharesubjecttodifferenttaxratesacrosscountriesD.Locallyproducedgoods,suchastransportationservices,whicharenoteasilytraded8.Theabsolutepurchasingpowerparitysaysthattheexchangeratebetweenthetwocurrenciesshouldbedeterminedbythe__________.A.relativeinflationrateofthetwocurrenciesB.relativepricelevelofthetwocountriesC.relativeinterestrateofthetwocurrenciesD.relativemoneysupplyofthetwocountries9.AccordingtotherelativePPP,ifcountryA’sinflationrateishigherthancountryB’sinflationrateby3%,__________.A.countryA’scurrencyshoulddepreciateagainstcountryB’scurrencyby3%B.countryA’scurrencyshouldappreciateagainstcountryB’scurrencyby3%C.itishardtosaywhethercountryA’scurrencyshouldappreciateordepreciateagainstcountryB’scurrency.TheexchangerateisinfluencedbymanyfactorsD.noneoftheaboveistrue10.Ifthelawofonepriceholdsforaparticulargood,wemayconcludethat__________.A.thereisnotradebarriersforthegoodamongthedifferentnationsB.thepriceofthegoodisthesameignoringtheotherexpensesC.arbitrageforthegooddoesnotexistD.alloftheabovearetrue11.Aninvestorborrowsmoneyinonemarket,sellstheborrowedmoneyonthespotmarket,investstheproceedsofthesaleinanotherplaceandsimultaneouslybuysbacktheborrowedcurrencyontheforwardmarket.Thisiscalled__________.A.uncoveredinterestarbitrageB.coveredinterestarbitrageC.triangulararbitrage3D.spatialarbitrage12.Realreturnequalizationacrosscountriesonsimilarfinancialinstrumentsiscalled__________.A.interestrateparityB.uncoveredinterestparityC.forwardparityD.realinterestparity13.Inwhichofthefollowingsituationswouldaspeculatorwishtosellforeigncurrencyontheforwardmarket?A.IfE[S1d/f]F1d/fB.IfE[S1d/f]F1d/fC.IfE[S1d/f]=F1d/fD.IfE[S1d/f]=1/F1d/f14.AccordingtoIRP,iftheinterestrateincountryAishigherthanthatincountryB,theforwardexchangerate,definedasF1A/Bisexpectedtobe__________.A.lowerthanthespotrateS0A/BB.thesameasthespotrateS0A/BC.higherthanthespotrateS0A/BD.necessarythesameasthefuturespotrateS1A/B15.Forarbitrageopportunitiestobepracticable,__________.A.arbitragersmusthaveinstantaccesstoquotesB.arbitragersmusthaveinstantaccesstoexecutionsC.arbitragersmustbeabletoexecutethetransactionswithoutaninitialsumofmoneyrelyingontheirbank’screditstandingD.Alloftheabovemustbetrue.16.The__________statesthattheforwardexchangeratequotedattime0fordeliveryattimetisequaltowhatthespotrateisexpectedtobeattimet.A.interestrateparityB.uncoveredinterestparityC.forwardparityD.realinterestparity17.AssumeexpectedvalueoftheU.S.dollarinthefutureislowerthanthatnowcomparedtothevalueoftheJapaneseyen.TheU.S.inflationratemustbehigherthanJapan’sinflationrateaccordingto__________.A.relativePPPB.FisherequationC.InternationalFisherrelationD.IRP418.Accordingtocoveredinterestarbitrageifaninvestorpurchasesafive-yearU.S.bondthathasanannualinterestrateof5%ratherthanacomparableBritishbondthathasanannualinterestrateof6%,thentheinvestormustbeexpectingthe__