International Finance MCQ Quiz - Multiple Choice Questions & Answers Page 2

11. Ask quote is for

1. Seller
2. Buyer
3. Hedger
4. Speculator

12. By definition, currency appreciation occurs when

1. the value of all currencies fall relative to gold.
2. the value of all currencies rise relative to gold.
3. the value of one currency rises relative to another currency.
4. the value of one currency falls relative to another currency.

13. Counterparty risk is:

1. The risk of loss when exchange rates change during the period of a financial contract
2. Based on the notional amount of the contract
3. The risk of loss if the other party to a financial contract fails to honour its obligation
4. Present only with exchange-traded options

14. Covered interest rate parity occurs as the result of:

1. the actions of market-makers
2. interest rate arbitrage
3. purchasing power parity
4. stabilising speculation

15. Exchange rates

1. are always fixed
2. fluctuate to equate the quantity of foreign exchange demanded with the quantity supplied
3. fluctuate to equate imports and exports
4. fluctuate to equate rates of interest in various countries

16. Foreign currency forward market is

1. An over the counter unorganized market
2. Organized market without trading
3. Organized listed market
4. Unorganized listed market

17. Forward premium / differential depends upon

1. Currencies fluctuation
2. Interest rate differential between two countries
3. Demand & supply of two currencies
4. Stock market returns

18. Given a home country and a foreign country, purchasing power parity suggests that:

1. the home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate;
2. the home currency will depreciate if the current home interest rate exceeds the current foreign interest rate;
3. the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.
4. the home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate;

19. Hedging is used by companies to:

1. Decrease the variability of tax paid
2. Decrease the spread between spot and forward market quotes
3. Increase the variability of expected cash flows
4. Decrease the variability of expected cash flows

20. If inflation is expected to be 5 per cent higher in the United Kingdom than in Switzerland:

1. purchasing power parity would predict that the UK spot rate should decline by about 5 per cent;
2. the theory of purchasing power parity would predict a drop in nominal interest rates in the United Kingdom of approximately 5 per cent;
3. expectations theory would suggest that the spot exchange rates between the two countries should remain unchanged over the long run;
4. the efficient market hypothesis suggests that no predictions can be made under a system of freely floating rates.