tb05.docx
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Chapter5TheInternationalParityConditions
True/False
1.Thelawofonepricestatesthat“Equivalentassetssellforthesameprice.”
ANS:
True.
2.Pureorrisklessarbitrageisdefinedasaprofitablepositionobtainedwithnonetinvestmentandnorisk.
ANS:
True.
3.Speculatorsmaketheirprofitfromsituationsinwhichtheyhavenonetinvestmentandnorisk.
ANS:
False.Theytypicallyhaveaninvestmentatrisk.
4.Arbitrageursmaketheirprofitbyidentifyingsituationsinwhichtheycanprofitablyputtheirownmoneyatrisk.
ANS:
False.Pure(orriskless)arbitrageinvolvesnorisk.
5.Theactionsofarbitrageurspromotethelawofonepriceincurrencymarkets.
ANS:
True.
6.Realassetsaremorelikelytoconformtothelawofonepricethanfinancialassets.
ANS:
False.Becausemarketfrictionsaregenerallylowerforfinancialassetsthanforrealassets,financialassetsaremorelikelytoconformtothelawofoneprice.
7.PricesintwocurrenciesarerelatedthroughtheequationPd=PfSd/f.
ANS:
True.
8.PricesintwocurrenciesarerelatedthroughtheequationPd=Pf/Sd/f.
ANS:
False.PricesarerelatedthroughtheequationPd=PfSd/for,equivalently,Pd/Pf=Sd/f.
9.PricesintwocurrenciesarerelatedthroughtheequationPd=Pf/Sf/d.
ANS:
True.Pd=PfSd/f=Pf/Sf/d.
10.Locationalarbitrageensuresthatbilateralexchangeratesareinequilibrium.
ANS:
True.
11.Evenifquotedexchangeratesdonotallowarbitrage,banksquotingthelowestofferpricesinacurrencywillattractthebulkofcustomerpurchasesinthatcurrency.
ANS:
True.
12.Abankisinalongeuroandshortyenpositionwhenithaspurchasedeurosandsoldyen.
ANS:
True.
13.Abankisinashorteuroandlongyenpositionwhenithaspurchasedeurosandsoldyen.
ANS:
False.Purchasing(selling)anassetcreatesalong(short)positioninthatasset.
14.Acurrencycrossratedoesnotinvolvethedomesticcurrency.
ANS:
True.
15.Thefollowingexchangeratesareinequilibrium:
SSFr/€=SFr1.60/€,S€/¥=€0.0125/¥,andS¥/SFr=¥50.00/SFr.
ANS:
True.SSFr/€S€/¥S¥/SFr=(SFr1.60/€)(€0.0125/¥)(¥50/SFr)=1.
16.Thefollowingexchangeratesareinequilibrium:
SSFr/€=SFr1.7223/€,S€/¥=€0.009711/¥,andS¥/SFr=¥61.740/SFr.
ANS:
False.SSFr/€S€/¥S¥/SFr=1.0326>1.Triangulararbitragewouldyieldaprofitsolongastransactionscostsarelessthanabout3.26%.
17.SupposeSSFr/€=SFr1.50/€andS¥/€=¥135/€.ThespotrateshouldbeS¥/SFr=¥90/SFr.
ANS:
True.SSFr/€S€/¥S¥/SFr=(SFr1.5000/€)(¥135/€)-1(¥90/SFr)=1.
18.Interestrateparity(IRP)holdswithintheboundsoftransactionscostsintheinternationalcurrencyandEurocurrencymarkets.
ANS:
True.
19.Forwardpremiumsanddiscountsdependoninterestratedifferentials.
ANS:
True.
20.Coveredinterestarbitrageensuresthattheratioofforwardtospotexchangeratesisdeterminedbytheinflationdifferentialbetweentwocurrencies.
ANS:
False.Forward/spotratiosaredeterminedbyinterestratedifferentials.
21.EmpiricalevidenceindicatesthatforwardparityholdsintheinternationalcurrencyandEurocurrencymarkets.
ANS:
False.Interestrateparityistheonlyreliableinternationalparitycondition.
22.EmpiricalevidenceindicatesthatrelativepurchasingpowerparityholdsintheinternationalcurrencyandEurocurrencymarkets.
ANS:
False.Interestrateparityistheonlyreliableinternationalparitycondition.
23.Empiricalevidenceindicatesthatrelativepurchasingpowerparitycanbeusedtosuccessfullypredictshort-termchangesinspotexchangerates.
ANS:
False.Intheshortrun,inflationdifferentialsarenotverygoodpredictorsofactualchangesinspotexchangerates.
24.ThespotexchangeratebetweenSwissfrancsanddollarsisS0SFr/$=SFr1.7122/$.Expectedinflationis0percentinSwitzerlandand11percentintheUnitedStates.Usingrelativepurchasingpowerparity,theexpectedspotrateinoneperiodisE[S1SFr/$]=SFr1.5425/$.
ANS:
True.E[S1SFr/$]=S0SFr/$(1+E[pSFr])/(1+E[p$])=(SFr1.7122/$)(1.00/1.11)=SFr1.5425/$.
25.Deviationsfrompurchasingpowerparityinrealexchangeratescanpersistforseveralyears.
ANS:
True.
26.Becausecurrenciesarestandardizedassetsthatareactivelytradedininternationalmarkets,realdeviationsfrompurchasingpowerparityarerareandfleeting.
ANS:
False.Realdeviationsfrompurchasingpowerparitycanbelargeandpersistent.
27.Realchangesincurrencyvaluesreflectchangesinrelativepurchasingpower.
ANS:
True.
28.Realexchangeratechangesaredeterminedbyinflationdifferentials.
ANS:
False.Realchangesequalnominalchangesadjustedforinflationdifferentials.
29.Real(inflationadjusted)exchangeratechangeshavelittleeconomicsignificance.
ANS:
False.Realexchangeratechangesreflectchangesinpurchasingpower.
30.Arealappreciationinthevalueofacurrencyincreasesthepurchasingpowerofthatcurrencyrelativetoothercurrencies.
ANS:
True.
31.Anominalappreciationofthedomesticcurrencyraisesthepriceofdomesticgoodsrelativetoforeigngoods.
ANS:
False.Onlyarealappreciationofthedomesticcurrencyraisesthepriceofdomesticgoodsrelativetoforeigngoods.
32.Fordailymeasurementintervals,bothnominalandrealexchangeratesareclosetoarandomwalk.
ANS:
True.
33.Thereisnocorrelationbetweenannualchangesinrealexchangerates.
ANS:
False.Realexchangeratesareautocorrelated(thatis,autoregressive).
34.Anappreciationofthedomesticcurrencybeyondthatnecessarytooffsettheinflationdifferentialbetweenaforeigncountryandthedomesticcountrylowersthepriceofforeigngoodsrelativetodomesticgoods.
ANS:
True.
35.Anincreaseintherealvalueofforeigncurrencieshelpsthedomesticeconomyasimportedgoodsandrawmaterialscostless.
ANS:
False.Althoughanappreciationofaforeigncurrencymayhelpdomesticexporters,itwillhurtimportersandconsumersasforeigngoodswillcostmore.
36.Anincreaseinthenominalexchangeratehelpsthedomesticeconomyasimportedgoodsandrawmaterialscostless.
ANS:
False.Changesinrealexchangeratesaremuchmoreimportantinfluences.
37.Relativepurchasingpowerparityholdsovertheshortrun.
ANS:
False.RPPPmayholdinthelongrun,butgenerallydoesnotholdintheshortrun.
38.Empiricaltestsindicatethatpersistentinflationdifferentialsbetweentwocurrencieseventuallyhaveanimpactonnominalexchangerates.
ANS:
True.
39.Realexchangeratesarenominalexchangeratesminustheforward/spotpremiumordiscount.
ANS:
False.Realexchangeratesarenominalexchangeratesadjustedfordifferentialinflation.
40.Internationalparityconditionsareusefulforpredictingchangesintherealexchangerate.
ANS:
False.Theinternationalparityconditionspredictthatnominalexchangerateschangetoaccommodateinflationandinterestratedifferentials.Realexchangeratesremainthesame.
41.Empiricaltestsofforwardparityovershortforecastingperiodssuggestthatforwardexchangeratesarepoorpredictorsoffuturespotexchangerates.
ANS:
True.
42.Empiricalstudiesindicatethatforwardparityholdsateachpointintime.
ANS:
False.Deviationsfromforwardparityarepositivelyautocorrelated.Atanypointintime,thedeviationfromforwardparityislikelytobeofthesamesignasinthepreviousperiod.
43.Technicalanalysisusespastpricepatternstoforecastexchangerates.
ANS:
True.
44.Technicalanalystsbelievethatthecurrencymarketsareweakformefficient.
ANS:
False.Weakformefficientmarketshavenomemory.Technicalanalystssearchforexchangeratepatternsthatwouldnotbeapparentinaweakformefficientmarket.
45.Fundamentalanalysisusesmacroeconomicdatatoforecastexchangerates.
ANS:
True.
46.Fundamentalanalystsbelievethatthecurrencymarketsaresemi-strongformefficient.
ANS:
False.Semi-strongformefficientmarketsareinformationallyefficientwithrespecttopubliclyavailableinformation.Fundamentalanalystsbasetheirforecastsonrelationshipsbetweenexchangeratemovementsandpubliclyavailablemacroeconomicdatasuchasbalanceofpaymentsstatistic,inflation,andrealandnominalinterestratemovements.
MultipleChoice
1.Therelationbetweeninterestratedifferentialsandexpectedinflationdifferentialsiscalled____.
a.forwardparity
b.interestrateparity
c.relativepurchasingpowerparity
d.theinternationalFisherrelation
e.noneoftheabove
ANS:
D
2.Therelationbetweenexpectedfuturechangesinthespotrateandexpectedinflationdifferentialsiscalled____.
a.forwardparity
b.interestrateparity
c.relativepurchasingpowerparity
d.theinternationalFisherrelation
e.noneoftheabove
ANS:
C
3.Therelationbetweentheforwardexchangeratesandexpectedfuturespotratesiscalled____.
a.forwardparity
b.interestrateparity
c.relativepurchasingpowerparity
d.theinternationalFisherrelation
e.noneoftheabove
ANS:
A
4.Therelationbetweentheforward/spotratioandinterestratedifferentialsiscalled____.
a.forwardparity
b.interestrateparity
c.relativepurchasingpowerparity
d.theinternationalFisherrelation
e.noneoftheabove
ANS:
B
5.S$/ArPeso=$0.35/ArPesoandSArPeso/Rand=ArPeso0.31/Rand.WhatisSRand/$?
a.Rand0.886/$
b.Rand1.129/$
c.Rand3.226/$
d.Rand3.459/$
e.Rand9.217/$
ANS:
E
6.Annualinterestratesare6%ineurosand5%indollars.ThespotrateisS0$/€=$1.20/€.Whatistheone-yearforwardexchangerate?
a.$1.18/€
b.$1.19/€
c.$1.20/€
d.$1.21/€
e.$1.22/€
ANS:
B
7.Ifannualinterestratesare10%intheU.S.and4%inS
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