Question

Question: 1. The exchange rate between the British pound and the Australian dollar (GBP/AUD) is 0.2650...

1. The exchange rate between the British pound and the Australian dollar (GBP/AUD) is 0.2650, it means a(an)

(a) indirect quote from an Australian perspective with a rate of 3.7735

(b) indirect quote from an Australian perspective with a rate of 0.2650

(c) indirect quote from a British perspective with a rate of 0.2650

(d) direct quote from a British perspective with a rate of 3.7735

2. Which of the following explanations about Covered interest parity (CIP) is true?

(a) If CIP holds, foreign currency financing (investment) and domestic currency financing (investment) will produce the same cost of borrowing (rate of return).

(b) If CIP is violated, such that the forward spread is lower than the interest differential, then domestic currency financing (investment) will be more (less) desirable.

(c) If CIP is violated, such that the forward spread is higher than the interest differential, then domestic currency financing (investment) will be less (more) desirable.

(d) None of the above.

3. Foreign exchange risk refers to:

(a) the variability of the domestic currency value of certain items resulting from the variability of the exchange rate.

(b) the variability of the foreign currency value of certain items resulting from the variability of the exchange rate.

(c) the variability of the exchange rate.

(d) the variability of the foreign currency value of certain assets.

4. The theory of purchasing power parity (PPP) describes the relation between:

(a) Domestic currencies and foreign currencies.

(b) Bid rates and ask (offer) rates.

(c) Prices and exchange rates.

(d) Prices and ask (offer) rates.

5. Deregulation provides ……… opportunities for foreign investment because direct investment can take place more readily in the ………. of capital controls.

(a) Vast / existence

(b) Less / absence

(c) Vast / absence

(d) Less / existence

6. Which of the following statements is true?

(a) The domestic currency value of foreign assets rises when the foreign currency appreciates.

(b) The foreign currency value of foreign assets rises when the foreign currency appreciates.

(c) a and b

(d) The domestic currency value of foreign assets falls when the foreign currency appreciates.

7. If the exchange rate is measured in direct quotation (domestic/foreign), all of the following are true of long exposure except:

(a) It measures the fall in domestic currency value of foreign assets as the exchange rate increases.

(b) It refers to exposure to foreign assets.

(c) The exposure line has a positive slope.

(d) It measures the rise in domestic currency value of foreign assets as the exchange rate increases.

8. Which of the problematic characteristics of forward contracts led to the emergence of futures contracts? (a) The dimensions of the forward contracts, specifically size and maturity dates.

(b) The risk of default.

(c) The lack of liquidity.

(d) All of the above reasons.

9. BHP has borrowed 100 million us dollars from the U.S. bond market. Given this, the following are true:

(i) BHP has a long exposure to USD

(ii) BHP has a short exposure to USD

(iii) BHP has a positive exposure beta

(iv) BHP has a negative exposure beta

(a) (ii) and (iii)

(b) (i) and (iii)

(c) (ii) and (iv)

(d) (i) and (iv)

10. The main difference between multinational firms and transnational firms is that transnational firms have:

(i) Foreign investments

(ii) Higher currency and financial risks

(iii) Decentralized decision-making

(a) (i) only

(b) (ii) only

(c) (iii) only

(d) (i) and (iii)

Answer 1

1.The Exchange rate between the British pound and the Australian dollar(GBP/AUD) is 0.2650. It means an:

c) indirect quote from a British perspective with a rate of 0.2650

2.Which of the following explanations about Covered interest parity(CIP) is true?

b)If CIP is violated, such that the forward spread is lower than the interest differential,then domestic currency financing will be more desirable.

3.Foreign exchange risk refers to:

b)the variability of the foreign currency value of certain items resulting from the variabilty of the exchange rate

4.The theory of purchasing power parity(PPP) describes the relation between:

a)domestic currencies and foreign currencies

5.Deregulation provides.......opportunities for foreign investment because direct investment can take place more readily in the........of capital controls:

c)Vast/absence

6.Which of the following statements is true?

d)The domestic currency value of foreign assets falls when the foreign currency appreciates.

7.If the exchange rate is measured in direct quotation(domestic/foreign),all of the following are true of long exposure except:

d)It measures the rise in the domestic currency value of foreign assets as the exchange rate increases

8.Which of the problematic characteristics of forward contracts led to the emergence of future contracts?:

d)All of the above reasons

9.BHP has borrowed 100 million US dollar from the US bond market. Given this, the following are true:

b)i and iii

10.The main difference between multinational firms and transational firms is that transational firms have:

c)iii only