QUIZ FIN542

The International Fisher equation states that...

• ...domestic inflation rates will tend to equal foreign inflation rates.

• ...domestic real interest rates will tend to equal foreign real interest rates.

• ...the expected exchange rate depreciation of the domestic currency is equal to the future inflation differential (foreign minus domestic inflation).

• ...the difference between the bid-ask spread for an exchange rate is equal to the future inflation differential (foreign minus domestic inflation).

To understand the current nominal exchange rate, we need to know all of the following except...

• ...the long-run value of the exchange rate.

• ..last period's nominal exchange rate.

• ...present and future expected domestic interest rates.

• ..present and future expected foreign interest rates.

Suppose the following bilateral spot exchange rates are being quoted for the Danish krone (DKK), the US dollar (US$) and the euro (€):
US$/€ = 1.5
DKK/€ = 7.0
DKK/$ = 5.0
If you start with 100€, the most you could end up with in a single round of triangular arbitrage would be...

• 93.33

• 98.66

• 103.25

• 107.14

(A) ________ interest rate parity involves (B) _______ domestic and foreign interest rates and the spot and the (C) __________ exchange rates.

• (A) Covered; (B) riskless; (C) expected future

• (A) Covered; (B) riskless; (C) forward

• (A) Uncovered; (B) future; (C) forward

• (A) Uncovered; (B) future; (C) forward

Over the long run the rate of depreciation of the nominal exchange rate between two countries is approximately equal to the difference in national _________ rates.

• real output growth

• real interest

• productivity growth

• inflation

Which of the following is not a special feature of the foreign exchange rate market?

• Prices of foreign currencies have spill-over effects on international trade

• Often, monetary authorities aim at stabilizing (or even fixing) the exchange rate

• Dynamics of the exchange rate have effects on the interest rate

• The supply-side quantity of the exchange rate market is virtually unlimited

Which statement about the uncovered parity condition is true?

• To rule out the possibility of arbitrage, interest differentials and expected appreciation have to be equal

• It will only hold as long as a risk premium is included

• Investors have to be risk neutral in order to buy uncovered foreign bonds

• Bonds from other countries are always associated with risk

Long-term exchange rate fluctuations tend to be (A) ________ than daily changes in absolute terms, but there are (B) _______ changes which are (C) __________ reversed.

• (A) smaller; (B) fewer; (C) abruptly

• (A) smaller; (B) more; (C) rarely

• (A) larger; (B) fewer; (C) abruptly

• (A) larger; (B) fewer; (C) rarely

Month-to-month changes in exchange rates accounts for (A) ________ of the monthly trade balances. Countries with persistent trade deficits tend to have (B) _______ currencies.

• A) little; (B) depreciating

• (A) most; (B) appreciating

• (A) little; (B) appreciating

• (A) most; (B) depreciating

The nominal exchange rate is forward-looking. What does that mean for its current value?

• It depends equally on past and expected events.

• It is exclusively determined by current expectations about the future.

• It will slowly adjust to any expected future level.

• Only variables from future periods determine the current value.