overed interest parity (CIP) refers to the situation in which: a. interest rates are the same in both currencies. b. spot and forward rates are the same in both currencies. c. the forward rate between the two currencies is equal to the ratio of their returns times the spot rate between the two currencies. d. there is an opportunity for arbitrage whenever prices are sluggish and sticky.

overed interest parity (CIP) refers to the situation in which: a. interest rates are the same in both currencies. b. spot and forward rates are the same in both currencies. c. the forward rate between the two currencies is equal to the ratio of their returns times the spot rate between the two currencies. d. there is an opportunity for arbitrage whenever prices are sluggish and sticky.

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter13: Emerging Topics In Managerial Accounting

Section: Chapter Questions

Problem 47E: Match each term in Column A with its related definition in Column B. Column A 1. ____________ Spot...

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Match each term in Column A with its related definition in Column B. Column A 1. ____________ Spot rate 2. ____________ Currency appreciation 3. ____________ Translation risk 4. ____________ Transaction risk 5. ____________ Exchange rate Column B a. The rate at which one currency can be traded for another currency. b. The possibility that future cash transactions will be affected by changing exchange rates. c. A month ago, 1 U.S. was worth 8.5 Mexican pesos. Today, 1 is worth 9.0 Mexican pesos. The U.S. dollar has undergone what? d. The degree to which a firms financial statements are exposed to exchange rate fluctuation. e. The exchange rate of one currency for another for immediate delivery (today).
Q1-10 If a PPP estimate of the dollar/pound exchange rate is $1.61/£ and the current spot rate is observed to be $1.68/£, on the basis of these two rates you should, viewing the long-run, a. expect the dollar to appreciate against the pound. b. take a "short" position in dollars. c. expect the pound to appreciate against the dollar. d. have no expectation regarding the likely movement of the dollar/pound exchange rate.
Q1-17 Suppose that the 3-month interest rate in New York is 4% and the 3-month interest rate in London is 3%, and that the spot rate is $2.00/£ and the 3-month forward rate is $2.10/£. In this situation, there is an incentive for short-term interest arbitrage funds to flow: a. from New York to London. b. from London to New York. c. neither from New York to London nor from London to New York. d. from New York to London, from London to New York, or in neither direction; an answer cannot be determined without more information.
PQ 3 In which of the following relationships between the expected future spot rate (E(e)) of a foreign currency and the current forward rate (e fwd) of a foreign currency would a speculator have an incentive to sell foreign currency in the forward market? a. E (e) = e fwd bb. E(e) greater than e fwd c. E(e) less than e fwd d. E (e) = (1/d fwd)
H10. Assume that initially, the risk premium, ρ = 0 and that the domestic and foreign interest rates are given by R = .06, R* = .05. Suppose that the risk premium depends linearly on the difference between domestic government debt, B, and domestic assets of the central bank, A, i.e., ρ = ρ (B-A) Find the new domestic interest rate if a sterilized purchase of foreign assets adjusts A s.t. (a) B - A = -.01/ ρ0 (b) B - A = .03/ ρ0
Q1-7 If UK interest rates are higher than Japanese interest rates, then the theory of covered interest arbitrage would suggest that, in the £/yen exchange markets, the yen would be at a forward ______ and the pound would ______. a. discount / be at a forward premium b. discount / also be at a forward discount c. premium / also be at a forward premium d. premium / be at a forward discount
Q3-3 Under a flexible-rate system, when the BP curve is flatter than the LM curve (i.e., there is relative capital mobility), an autonomous increase in foreign interest rates will have what impacts on the domestic interest rate and domestic national income? Select one: a. domestic interest rate will increase, domestic national income will decrease b. domestic interest rate will increase, domestic national income will not change c. domestic interest rate will increase, domestic national income will increase d. domestic interest rate will not change, domestic national income will decrease
Q1-16 In which of the following relationships between the expected future spot rate [E(e)] of a foreign currency and the current forward rate (efwd) of a foreign currency would a speculator have an incentive to sell foreign currency in the forward market? a. E(e) < efwd b. E(e) > efwd c. E(e) = efwd d. E(e) = (1/efwd)
D3) Finance Use covered interest rate parity (CIP) to show that a fixed exchange rate and free capital flows imply that a central bank cannot set the interest rate independently from the interest rate set by the reference currency's central bank.
PQ 5 In the monetary yapproach to the exchange rate, which of the following will cause a depreciation of A's currency relative to B's currency? a. an increase in the amount of money demanded at each income level in the country B b. an increase in the money supply in country B c. a fall in the real income in country B d. a decrease in the money supply in country A
Q2-5 In the monetary approach to the balance of payments (under flexible exchange rates) an increase in the proportion of income that people in country A wish to hold as money would, other things equal, lead to _______ in country A's demand for money and to ______ of A's currency in the foreign exchange markets. a. an increase / a depreciation b. an increase / an appreciation c. a decrease / a depreciation d. a decrease / an appreciation
MCQ & True/false : International Financial Management: 1. Changes in relative inflation rates can affect international trade activity, which influences the demand for and supply of currencies and therefore influences exchange rates. (a) True (b) False 2. Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6% premium. Today’s spot rate of the Canadian dollar is £0.47. The spot rate forecasted for one year ahead is: (a) £0.4418 (b) £0.3418 (c) £0.4982 (d) £0.5418 3. A currency call option grants the right to buy a specific currency at a designated price within a specific period of time. (a) True (b) False