International Finance Multiple Choice Questions and Answers for Practice

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.

21. If one anticipates that the pound sterling is going to appreciate against the US dollar, one might speculate by ..............pound call options or .............pound put options.

1. buying; buying
2. selling; buying
3. selling; selling
4. buying; selling

22. If portable disk players made in China are imported into the United States, the Chinese manufacturer is paid with

1. international monetary credits.
2. dollars.
3. yuan, the Chinese currency.
4. euros, or any other third currency.

23. If purchasing power parity were to hold even in the short run, then:

1. real exchange rates should tend to decrease over time;
2. quoted nominal exchange rates should be stable over time.
3. real exchange rates should tend to increase over time;
4. real exchange rates should be stable over time;

24. If the U.S. dollar appreciates relative to the British pound,

1. it will take fewer dollars to purchase a pound
2. it will take more dollars to purchase a pound
3. it is called a weakening of the dollar
4. both a & c

25. If transaction exposure are in same dates, then it can be hedged

1. By purchasing single forward contract
2. By purchasing multiple forward contract
3. Cannot be hedged by forward contracts
4. None of the above

26. In a quote exchange rate, the currency that is to be purchase with another currency is called the

1. liquid currency
2. foreign currency
3. local currency
4. base currency

27. In the foreign exchange market, the ............of one country is traded for the .............of another country.

1. currency; currency
2. currency; financial instruments
3. currency; goods
4. goods; goods

28. Interest Rate Parity (IRP) implies that:

1. Interest rates should change by an equal amount but in the opposite direction to the difference in inflation rates between two countries
2. The difference in interest rates in different currencies for securities of similar risk and maturity should be consistent with the forward rate discount or premium for the foreign currency
3. The interest rates between two countries start in equilibrium, any change in the differential rate of inflation between the two countries tends to be offset over the longterm by an equal but opposite change in the spot exchange rate
4. In the long run real interest rate between two countries will be equal

29. Interest rate swaps are usually possible because international financial markets in different countries are

1. Efficient
2. Perfect
3. Imperfect
4. Both a & b

30. It is very difficult to interpret news in foreign exchange markets because:

1. very little information is publicly available
2. most of the news is foreign
3. it is difficult to know which news is relevant to future exchange rates
4. it is difficult to know whether the news has been obtained legally