Homework and exam International finance& Strategic management

Homework5&6

1. In a freely floating exchange rate system, if the capital account surplus for the U.S. rises, what will most likely happen to the real value of the dollar?

a. it will decline b. it will rise c.there is no impact on the dollar d.the IMF will step in to adjust rising exchange rates

2. If a real value of a nation's freely floating currency increases, and the nation's current account is initially zero, its capital account will most likely be a. in deficit b. in surplus c. adjusted for the rate of inflation d. decreased by the amount of increase in the current account

3. In a freely floating exchange rate system, if the capital account is running a deficit a. the balance of payments must run a deficit b. the balance of payments must be zero c. the current account must run a surplus d. b and c above

4. As the real value of the dollar rises, the balance on current account is likely to a. increase b. decrease c. stay the same d. move with the capital account adjustments factor

5. In a freely floating exchange rate system, if the current account is running a deficit

a. the balance of payments must run a deficit b. the balance of payments must be zero c. the capital account must run a surplus d. b and c above

6. In a freely- floating exchange rate system, the sale of Japanese cars to the United States will be offset by which item on the US balance of payments?

a. a credit on the current account b. a credit on the capital account c. a debit on the trade account d. a or b

7. The Japanese current account surplus can best be attributed to a. the high rate of Japanese domestic investment b. Japanese protectionism

c. the high rate of Japanese savings d. government budget deficits

8. According to the J-curve theory, a country’s trade deficit a. decreases just after its currency depreciates b. increases just after its currency appreciates c. increases just after its currency is pegged to the dollar d. worsens just after its currency depreciatees

9.Suppose Lufthansa buys 10 Boeing 747s for $150 million in 1991, financed by a five- year loan from the US Export- Import Bank There is a one year grace period on principal and interest payments The net impact of this sale in 1991 is

a. a $150 million reduction in the U.S. trade deficit b. a $150 million increase in the U.S. capital account surplus c. positive change in the U.S. balance of payments in 1991 d. a $500 million reduction in the U.S. trade deficit

10. If a nation's income exceeds its spending, then a. savings will be less than domestic investment b. the nation must run a current- account deficit c. the balance of payments will have deficits for the next two years d. the nation must run a capital- account deficit

11. A nation that is running a savings deficit a. must spend more than it produces b. will invest domestically more than it saves c. must have a net capital outflow d. a and b only

12. In order to reduce its current- account deficit, the United States must do which of the following?

a. reduce the federal budget deficit b. lower national product relative to national spending c. reduce savings relative to domestic investment d. reduce the federal budget surplus

13. The spot and 30- day forward rates for the Dutch guilder are $.3075 and $.3120, respectively. The guilder is said to be selling at a forward a. premium of 16.83% b. premium of 17.56% c. discount of 6.39% d. discount of 15.10%

14. Suppose the spot direct quotes for the pound sterling and French franc are $1.3981- 89 and $.1130- 33, respectively. What is the direct quote for the pound in Paris? a. 12.3398- 3796

b. 12.3469- 3726 c. .0808- 12 d. .0976- 87

ANSWER: a: spot quotations

15. Suppose the following direct quotes are received for spot and one- month French francs in New York: .1160- 684- 6. Then the outright 30- day forward quote for the French franc is: a. .1156- 62 b. .1164- 74 c. .1166- 72 d. .1154- 64

16. Suppose the spot direct quotes for the Swedish krona and French franc are $.1395- 99 and $.1130- 33, respectively. What is the direct quote for the krona in Paris? a. 1.2312- 81 b. 1.2435- 37 c. .0806- 11 d. .0973- 81

17. Suppose sterling is quoted at $1.4419-36, and the Swiss franc is quoted at $0.6250-67. What is the direct quote for the pound in Zurich? a. 2.3035-70 b. 2.3018- 88 c. 2.3008-98 d. 2.3020-50

18. Suppose the Brazilian Real is quoted at $0.9455-9510, and the Thai baht is quoted at $25.2513-3986. What is the direct quote for the Real in Bangkok? a. 27.1267-5673 b. 26.7801-9801 c. 25.2597-2700 d. 26.5524-8626

19. If the direct price of the dollar is 2.5 in Frankfurt and transaction costs are .4% of the amount transacted, then the minimum- maximum direct quotes for the DM in New York are: a. .3968- 4032 b. 2.4800- 2.5200 c. .3984- .4016 d. 2.4900- 2.5100

20. Suppose the 90- day forward quotes on the DM and the French franc are $.4002- 10 and $.1180- 90, respectively. What is the direct 90- day forward quote for the franc in Frankfurt?

a. 3.3625- 54 b. 3.3631- 92 c. .2943- 74 d. .2949- 68

21. The spot and 180- day forward rates for the DM are $.3310 and $.3402, respectively. The DM is said to be selling at a forward a. discount of 2.8% b. premium of 2.8% c. discount of 5.6% d. premium of 5.6%

22. Suppose the spot direct quotes for the Italian lira and Swedish krone are $.00050- 51 and $.1201- 10, respectively. What is the direct quote for the Swedish krone in Milan? a. .00413- 25 b. .00422- 31 c. 235.49- 242.00 d. 237.81- 245.03

23. Suppose the direct quote for sterling in New York is 1.3110- 5. Then the direct quote for dollars in London is: a. .7110- 5 b. 2.6220- 30 c. .7625- 8 d. 1.3110- 5

24. On December 3,2001, spot Japanese yen were sold at $0.008058. Suppose the 180-day forward Japanese yen was selling at a 1.91% annualized premium, what is the 180-day forward rate of the yen? a. 0.008245 b. 0.008135 c. 0.008457 d. can’t tell

25. Suppose the spot rate and forward rate for the British pound are 1.4248 and 1.4179 respectively. Assume the forward pound is selling at a 1.94% annualized discount, what is the number of days of the forward contract? a. 180 days b. 120 days c. 90 days d. 60 days

26. Suppose one observed the following direct spot quotations in New York and London, respectively: 1.2500- 60 and .8000- 50. Arbitrage profits per $1 million equal

a. $637 b. $0 c. $1,268 d. $4,492

27. The $/DM exchange rate is DM1 = $.35 and the DM/FF exchange rate is FF1 = DM.31. What is the FF/$ exchange rate? a. 3.226 French francs per dollar b. 1.129 French francs per dollar c. .886 French francs per dollar d. 9.217 French francs per dollar