International Finance MCQs

Central banks often intervene in currency markets. This activity is called

managed floating.
fixing exchange rates.
currency warfare.
super-pegging.

Which of the following is an example of a regional currency arrangement?

exchange rate union
currency cartel associations
free-trade zones
most-favored nation status

Industrialized countries typically their floating exchange rates. Developing countries often their floating exchange rates.

manage; peg
peg; manage
allow markets to determine; fix
fix; manage

A central bank's international reserves consists of its holdings of

gold
silver and gold.
foreign assets and gold.
domestic assets and precious metals.

The liabilities side of a central bank's accounts consists of

deposits held by private banks.
currency in circulation.
deposits held by private banks and currency in circulation.
deposits held by foreign banks, domestic assets, and currency in circulation.

Which one of the following statements is most correct?

Any central bank purchase of assets automatically results in an increase in the domestic money supply, while any central bank sale of assets automatically causes the money supply to decline.
Any central bank purchase of assets results in an increase in the domestic money supply, while any central bank sale of assets causes the money supply to decline.
Any central bank purchase of assets automatically results in a decrease in the domestic money supply, while any central bank sale of assets automatically causes the money supply to decline.
Any central bank purchase of assets automatically results in a decrease in the domestic money supply, while any central bank sale of assets automatically causes the money supply to increase.

Which one of the following statements is the most correct?

If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in the home central bankâ€™s foreign asset implies an increased home money supply.
If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in the home central bank's foreign asset implies a decreased home money supply.
If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in the home central bank's foreign asset implies an increased home money demand.
If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in the home central bank's foreign asset implies an increased home money supply.

Which one of the following statements is most correct?

If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in a foreign central bank's claims on the home country implies a decreased foreign money supply.
If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money demand.
If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in a foreign central bankâ€™s claims on the home country implies a decreased foreign money supply.
If central banks are not sterilizing and the home country has a balance of payments shortage, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money supply.

A system of managed floating exchange rates is

a system in which governments may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed.
a system in which governments use flexible exchange rates.
a system in which governments are forbidden from attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed.
a system in which governments need to reach a prior agreement among them before they may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed.

Under fixed exchange rate, in general

the domestic and foreign interest rates are equal, R = R .
R = R + (Ee - E)/E.
the foreign and domestic interest rates are unequal.
the expected rate of domestic currency depreciation is high.

Under fixed exchange rate, in general which one of the following statements is the MOST accurate?

The following condition should hold for domestic money market equilibrium: Ms/P = L(R , Y).
The following condition should hold for domestic money market equilibrium: Md/P = L(R , Y).
The following condition should hold for domestic money market equilibrium: Ms = L(R , Y).
The following condition should hold for domestic money market equilibrium: P = L(R , Y).

Which one of the following statements is the MOST accurate?

Under a fixed exchange rate, central bank monetary tools are powerless to affect the economy's money supply.
Under a flexible exchange rate, central bank monetary tools are powerless to affect the economy's money supply or its output.
Under a fixed exchange rate, fiscal policy tools are powerless to affect the economy's money supply or its output.
Under a fixed exchange rate, central bank monetary tools are powerless to affect the economyâ€™s money supply or its output.

What is the expected dollar rate of return on dollar deposits if today's exchange rate is $1.10 per euro, next year's expected exchange rate...

10%
11%
-1%
0%

By fixing the exchange rate, the central bank gives up its ability to

adjust taxes.
increase government spending.
depreciate the domestic currency.
influence the economy through monetary policy.

Fiscal expansion under fixed exchange rates will have what temporary effect?

the money supply will decrease.
output will decrease.
the exchange rate will increase.
the exchange rate will decrease.

When a country's currency is devalued

output decreases and the money supply increases.
both the output and the money supply increases.
output decreases.
output increases and the money supply decreases.

Under fixed rates, which one of the following statements is the MOST accurate?

Monetary policy can affect only output.
Monetary policy can affect only employment.
Monetary policy can affect only international reserves.
Monetary policy can not affect international reserves.

Under fixed rates, which one of the following statements is the MOST accurate?

Fiscal policy can affect output, employment and international reserves at the same time.
Fiscal policy can affect only employment.
Fiscal policy can affect only international reserves.
Fiscal policy can affect only output and employment.

Which one of the following statements is the MOST accurate?

Fiscal policy has the same effect on employment under fixed and flexible exchange rate regimes.
Fiscal policy affects employment less under fixed than under flexible exchange rate regimes.
Fiscal policy affects employment more under fixed than under flexible exchange rate regimes.
Fiscal policy cannot affect employment under fixed exchange rate but does affect output under flexible exchange rate regimes.

The main reason(s) why governments sometimes chose to devalue their currencies is (are)

devaluation makes domestic goods more expensive in relation to foreign goods.
devaluation makes domestic services more expensive in relation to foreign services.
devaluation increases foreign reserves held by the central bank.
devaluation improves the current account and increases foreign reserves held by the central bank.

A balance of payments crisis is best described as

a sharp change in interest rates sparked by a change in expectations about the level of imports.
a sharp change in foreign reserves sparked by a change in expectations about the future exchange rate.
a sharp change in interest rates sparked by a change in expectations about the level of exports.
a sharp change in foreign reserves sparked by a change in expectations about the level of imports.

The expectation of future devaluation causes a balance of payments crisis marked by

a sharp rise in reserves and a fall in the home interest rate below the world interest rate.
a sharp fall in reserves and an even bigger fall in the home interest rate below the world interest rate.
a sharp fall in reserves and a rise in the home interest rate above the world interest rate.
a sharp rise in reserves and an even greater rise in the home interest rate above the world interest.

The expectation of future revaluation causes a balance of payments crisis marked by

Capital flight

increases reserves.
is never associated with the expectation of devaluation.
may undo expected devaluation.
decreases reserves and may induce devaluation.

Currency crises may result from

central bank balance sheets with higher liabilities than assets.
political upheaval leading to lowering exports.
a reconfiguration of central bank balance sheets.
speculative attacks on the currency or central banks purchasing excessive amounts of government bonds.

Which of the following best describes a deliberate government decision to lower the exchange rate, E?

appreciation
depreciation
revaluation
devaluation

Imperfect asset substitutability assumes

the returns on foreign and domestic currency bonds are identical.
the returns on foreign and domestic currency are unrelated.
the risks of holding foreign and domestic currency are identical.
the returns on foreign and domestic currency differ and are influenced by risk.

The global financial crisis of 2007-2008 resulted in a(n) of the Swiss franc as foreign currency flowed the country. As result, Swis...

depreciation; out of; more
depreciation; into; more
appreciation; out of; less
appreciation; into; less

The global financial crisis of 2007-2008 resulted in a(n) ________ of the Swiss franc. In 2011, the Swiss central bank intervened in order to cause a(...

appreciation; depreciation
appreciation; appreciation
depreciation; depreciation
appreciation; revaluation

Perfect asset substitutability is the assumption that

the foreign exchange market is in equilibrium only when expected returns on domestic assets are greater than returns on foreign currency bonds.
the foreign exchange market is in equilibrium only when expected returns on foreign currency bonds are greater than returns on domestic assets.
the foreign exchange market is in equilibrium only when expected returns on all assets are negative.
the foreign exchange market is in equilibrium only when expected returns on domestic assets are equal to returns on foreign currency bonds.

Imperfect asset substitutability exists

when it is possible for the expected returns on two assets to be different.
when the expected returns on two assets are the same.
only when one asset is foreign and the other is domestic.
when there is risk in the foreign exchange market.

The interest parity condition can be written as

R = R - (Ee - E)/E.
R = R + (Ee - E)/E.
R = R2 - (Ee - E)/E.
R = R /(Ee - E).

When domestic and foreign currency bonds are imperfect substitutes, the domestic interest rate (R) can be written as

R = R - (Ee - E)/E + Ï.
R = R - (Ee - E)/E.
R = R + (Ee - E)/E + Ï.
R = R - (Ee + E)/E + Ï.

In the interest rate parity condition with imperfect substitutes and a risk premium of Ï

an increased stock of domestic government debt will raise the difference between the expected returns on domestic and foreign currency bonds.
a decreased stock of domestic government debt will raise the difference between the expected returns on domestic and foreign currency bonds.
an increased stock of domestic government debt will reduce the difference between the expected returns on domestic and foreign currency bonds.
an increased stock of domestic government debt will have no effect on the difference between the expected returns on domestic and foreign currency bonds.

The signaling effect of foreign exchange intervention

never has any effect on exchange rates.
can alter the market's view of exchange rates independent from the stance of monetary and fiscal policies.
never leads to actual changes in monetary or fiscal policy.
can alter the marketâ€™s view of future monetary policies and cause an immediate exchange rate change.

From 1837 and up until the Civil War, the United States adhered to a

gold standard.
silver standard.
bimetallic standard.
bronze standard.

From the Civil War up to 1914, the United States adhered to a

gold standard.
silver standard.
bimetallic standard.
bronze standard.

If assets are imperfect substitutes, then an increase in the amount of domestic currency bonds held by the public will ________ the risk premium and _...

increase; leave unchanged
increase; decrease
increase; increase
decrease; decrease

If assets are imperfect substitutes, then a decrease in the amount of domestic currency bonds held by the public will ______ the risk premium and ...

decrease; leave unchanged
increase; decrease
increase; increase
decrease; decrease

Balance of payments crises under fixed exchange rates occur because of

government policies that are inconsistent with fixed exchange rates.
punitive currency wars.
global inflation and trade imbalances due to war.
excessive exports and imports that overload the global system.

A balance of payments crises under fixed exchange rates occurs when

a country runs out of foreign reserves.
a country is in a liquidity trap.
exports and imports expand beyond some point.
marginal returns on foreign exchange investments approach zero.

A weakening of the U.S. dollar with respect to the British pound would likely reduce the U.S. exports to Britain and increase U.S. imports from Britai...

True
False

Assume that some U.S. firms will purchase supplies from either China or from U.S. firms. If the Chinese yuan appreciates against the dollar, it should...

True
False

Exporters commonly complain that they are being mistreated because the currency of their country is too weak.

True
False

The LIBOR varies among currencies because the market supply of and demand for funds vary among currencies.

True
False

An MNC with receivables in Japanese Yen purchases yen forward to hedge its exposure to exchange rate fluctuations.

True
False

A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time.

True
False

The interest rate in developing countries is usually very low.

True
False

The strike price is also known as the premium price.

True
False

The exchange rates of smaller countries are very stable because the market for their currency is very liquid.

True
False

When expecting a foreign currency to depreciate, a possible way to speculate on this movement is to borrow dollars, convert the proceeds to the foreig...

True
False

Country X frequently engages in trade flows with the U.S. (such as imports and exports). Country Y frequently engages in capital flows with the U.S. (...

True
False

Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.

True
False

Since futures contracts are traded on an exchange, the exchange will always take the "other side" of the transaction in terms of accepting the credit ...

True
False

Due to put-call parity, we can use the same formula to price calls and puts

True
False

If the futures rate is above the forward rate, actions by rational investors would put upward pressure on the forward rate and downward pressure on th...

True
False

Margin requirements are deposits placed by investors in futures contracts with their respective brokerage firms when they take their position. They ar...

True
False

A European option can only be exercised at the expiration date, while an American option can be exercised any time prior to the expiration date.

True
False

The forward premium is the price specified in a call or put option.

True
False

An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign receivables. To do so, the MNC can either sell the foreign...

True
False

Margin is used in the forward market to mitigate default risk.

True
False

There are no transactions costs associated with trading futures or options.

True
False

Options can be traded on an exchange or over the counter.

True
False

American style options can be exercised any time up to maturity.

True
False

If a currency put option is out of the money, then the present exchange rate is less than the strike price.

True
False

The writer of a put option has a right, but not obligation, to buy the underlying currency from the option buyer.

True
False

Hedgers should buy calls if they are hedging an expected outflow of foreign currency.

True
False

If a currency's forward rate exhibits a discount, the currency is forced to appreciate.

True
False

If the forward rate for a currency is less than the spot rate for that currency, the forward rate is said to exhibit a premium.

True
False

Since corporations have specialized needs, they usually prefer futures contracts to forward contracts for hedging purposes.

True
False

A speculator in futures contracts expecting the value of a foreign currency to depreciate would likely sell futures contracts.

True
False

A currency call option grants the right to sell a specific currency at a designated price within a specific time period.

True
False

Currency call options allow the purchaser to lock in the price paid for a currency. Therefore, they are often used by MNCs to hedge foreign currency p...

True
False

Both call and put option premiums are affected by the level of the existing spot price relative to the strike price; for example, a high spot price re...

True
False

If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures contracts with the same maturity date.

True
False

An option writer is the seller of a call or a put option.

True
False

Hedgers should buy puts if they are hedging an expected inflow of foreign currency.

True
False

Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it would under a freely floating e...

True
False

An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain e...

True
False

A major advantage of the euro is the complete elimination of exchange rate risk on transactions between participating European countries, which encour...

True
False

If foreign investors fear that a peg may be broken because of fund outflows from that country, they may attempt to purchase more of that currency befo...

True
False

A common way to reduce inflation is to weaken the value of the domestic currency.

True
False

In a freely floating exchange rate system, high U.S. inflation rate may be magnified. This is because the depreciation of the dollar would result in m...

True
False

While a strong currency is a possible cure for high inflation, it may cause higher unemployment due to the attractive foreign prices that result from ...

True
False

While a weak currency can reduce unemployment at home, it can also lead to higher inflation, as local companies are better able to raise prices.

True
False

Assume the Fed desires to strengthen the dollar. If it buys dollars and simultaneously buys Treasury securities, this is an example of sterilized inte...

True
False

If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchan...

True
False

For locational arbitrage to be possible, one bank's ask rate must be higher than another bank's bid rate for a currency.

True
False

Assume locational arbitrage is possible and involves two different banks. The realignment that would occur due to market forces would increase one ban...

True
False

Triangular arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.

True
False

If interest rate parity (IRP) exists, then triangular arbitrage will not be possible.

True
False

Forward rates are driven by the government rather than market forces.

True
False

The interest rate on euros is 8%. The interest rate in the U.S. is 5%. The euro's forward rate should exhibit a premium of about 3%.

True
False

Realignment in the exchange rates of banks will eliminate locational arbitrage. More specifically, market forces will increase the ask rate of the ban...

True
False

Assume that the real interest rate in the U.S. and in the U.K. is 3%. The expected annual inflation in the U.S. is 3%, while in the U.K. it is 4%. The...

True
False

If purchasing power parity holds, then the Fisher effect must also hold.

True
False

If interest rate parity holds, and the international Fisher effect (IFE) holds, foreign currencies with relatively high interest rates should have for...

True
False

According to the IFE, when the nominal interest rate at home exceeds the nominal interest rate in the foreign country, the home currency should deprec...

True
False

The international Fisher effect (IFE) suggests that the currencies with relatively high interest rates will appreciate because those high rates will a...

True
False

A country seeking to maintain internal balance would be concerned

only with attaining low levels of unemployment.
primarily with ensuring that saving is weighted more towards domestic investment than the current account.
with large fluctuations in output or prices.
with maintaining an adequate stock of gold reserves.

Categories

International Finance MCQs