Question

11)Answer based on the following: Interest rate on U.S. assets = 5%, interest rate on European assets = 12%, the spot rate of exchange = 0.90 Euros/$, the one year forward rate of exchange = 0.95 EUROS/$. The European citizen should hold which asset?

	1) The Euro asset
	2) The Dollar asset

12)If real interest rates in Canada are above those in the Euro area,

	1) The Euro area is likely to see an appreciation of its currency.
	2) There will be more demand for Canadian goods resulting from the change in exchange rates.
	3) There will be more demand for European goods resulting from the change in exchange rates.
	4) Exchange rates will not be affected.

13)If there is more demand for U.S. stocks relative to stocks issued elsewhere,

	1) The Dollar may depreciate
	2) The Dollar may appreciate

14)Horizontal FDI involves

	1) Doing some part of the production process abroad
	2) Duplicating a firm’s plant abroad
	3) Accessing cheap labor abroad
	4) None of the above

15)Based on the offshoring articles that you read for this class

	1) The center of gravity of much of the world production has not changed
	2) The center of gravity of much of the world production has changed from advanced countries to developing countries
	3) The center of gravity of much of the world production remains in advanced countries
	4) None of the above.

Answer 1

11) Suppose a European citizen has a 900 Euros to invest. It means according to the spot rate it is equal to $1000.

If a person invest it in a Euro asset it will earn 12% on it that is 108 Euro. It means total sum be 1008 Euros.

If a person iinvest in US then it will earn 5% on it that is $50. It means that the total sum be $1050. But a European citizen wants this amount in Euro so convert $1050 in Euro at forward rate of 0.95Euro/$. So this amount in Euro will be 997.5 Euros. A person will get benefit by investing in Euro asset( Option 1)

12) As the real interest rate in Canada is more than that in Euro area so there will be higher investment Canada which cause rise in demand of Canadian $ as a result Value of CA$ will appreciate and Euro currency to depreciate(So option 1 and 4 are wrong). The appreciation of CA$ make it cheaper for Canadian people to buy more goods form Euro area. So they will demand more of Euro good and for Euro people canadian goods become expensive so they will buy less of canadian goods(option 2 is wrong)

So option 3 is the right answer.