Question: Foreign exchange trading in 2016 averaged about _____________ per day.
Answer: $5.09 trillion
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Question: The largest center for trading in foreign exchange is
Answer: london
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Question: A negotiated OTC agreement to exchange currencies at a fixed date in the future but at an exchange rate specified today is a
Answer: forward foreign exchange transaction.
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Question: The concept underlying purchasing power parity is the
Answer: Law of one price
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Question: In 2015, the U.S. imported goods and services worth about _____________ and exported about _________ leading to a current account ____________.
Answer: $3.7 trillion; $3.3 trillion; deficit
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Question: A U.S. firm has borrowed £50 million from a British firm. The borrower will need to convert dollars to pounds to repay the loan when it is due. The U.S. firm could hedge the exchange rate risk by
Answer: buying pounds forward.
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Question: An investor starts with $1 million and converts it to 0.75 million pounds, which is then invested for one year. In a year the investor has 0.7795 million pounds, which she then converts to dollars at an exchange rate of 0.72 pounds per dollar. The U.S. dollar annual rate of return earned was _____.
Answer: 8.26 percent

[(0.7795 million pounds/0.72)/$1 million] − 1 = 8.26%
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Question: An investor starts with €1 million and converts it to £694,500, which is then invested for one year. In a year the investor has £736,170, which she then converts back to euros at an exchange rate of 0.68 pounds per euro. The annual euro rate of return earned was _____.
Answer: 8.26 percent

[(£736,170/0.68)/€1 million] − 1 = 8.26%
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Question: Banks' net foreign exposure is equal to
Answer: net foreign assets + net FX bought.
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Question: If a firm has more foreign currency assets than liabilities, and no other foreign currency transactions, it has
Answer: positive net exposure
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Question: The levels of foreign currency assets and liabilities at banks have ___________ in recent years, and the level of foreign currency trading has ____________.
Answer: increased; increased
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Question: The agreement that ended the era of fixed exchange rates for the major economies was called the
Answer: Smithsonian Agreement II.
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Question: If interest rate parity holds and the annual German nominal interest rate is 3 percent and the U.S. annual nominal rate is 5 percent and real interest rates are 2 percent in both countries, then inflation in Germany is about _______________ than in the United States.
Answer: 2 percent lower
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Question: At the beginning of the year the exchange rate between the Brazilian real and the U.S. dollar was 2.2 reals per dollar. Over the year, Brazilian inflation was 12 percent and U.S. inflation was 4 percent. If purchasing power parity holds, at year-end the exchange rate should be approximately ________________ dollars per real.
Answer: 0.4182

[(4% − 12%) × (1/2.2)] + (1/2.2) = 0.4182
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Question: Which of the following conditions may lead to a decline in the value of a country's currency?
I. Low interest rates
II. High inflation
III. Large current account deficit
Answer: II and III only
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Question: The large U.S. current account deficit implies that
Answer: the United States must rely on foreigners to be willing to invest in the United States.
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Question: Which of the following are likely to lead to an appreciation of the U.S. dollar (ceteris paribus)?
I. Higher real U.S. interest rates
II. Lower U.S. inflation
III. Higher nominal U.S. interest rates
Answer: I and II only
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Question: You can buy or sell the £ spot at $1.98 to the pound. You can buy or sell the pound one-year forward at $2.01 to the pound. If U.S. annual interest rates are 5 percent, what must be the approximate one-year British interest rate if interest rate parity holds?
Answer: 3.45 percent

Using IRPT formula: 1 + .05 = (1/1.98) (1 + iUK ) × 2.01 and solve for iUK = 3.448%.
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Question: A U.S. bank has £120 million in loans to corporate customers and has £70 million in deposits it owes to customers with the same maturity. The bank has also sold £20 million pounds forward. The bank's net exposure is
Answer: £30 million.
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Question: The ________________ measures the net flows of imports and exports of goods, services, income payments, and unilateral transfers.
Answer: current account
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Question: The value of the British pound changed from $1.40 to $1.15. We can say that the pound has ________ and the dollar has ________.
Answer: depreciated; appreciated
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Question: The value of the British pound changed from $1.23 to $1.32. We can say that the pound has ________ and the dollar has ________.
Answer: appreciated; depreciated
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Question: The value of the Euro changed from $1.15 to $1.25. We can say that the dollar has ________ and the euro has ________.
Answer: depreciated; appreciated
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Question: The value of the Euro changed from $1.20 to $1.14. We can say that the dollar has ________ and the euro has ________.
Answer: appreciated; depreciated
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Question: If the dollar appreciates relative to the Euro then:
Answer: European cars will become less expensive in the United States.
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Question: A U.S. investor has borrowed pounds, converted them to dollars, and invested the dollars in the United States to take advantage of interest rate differentials. To cover the currency risk, the investor should
Answer: buy pounds forward.
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Question: A U.S. bank borrowed dollars, converted them to euros, and invested in euro-denominated CDs to take advantage of interest rate differentials. To cover the currency risk the investor should
Answer: sell euros forward
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Question: A U.S. firm has £50 million in assets in Britain that they need to repatriate in six months. They could hedge the exchange rate risk by
Answer: both selling pounds forward and borrowing pounds.
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Question: A U.S. bank converted $1 million to Swiss francs to make a Swiss franc loan to a valued corporate customer when the exchange rate was 1.2 francs per dollar. The borrower agreed to repay the principal plus 5 percent interest in one year. The borrower repaid Swiss francs at loan maturity and when the loan was repaid the exchange rate was 1.3 francs per dollar. What was the bank's dollar rate of return?
Answer: −3.08 percent

{[($1 million × SFr 1.2 × 1.05)/SFr 1.3/$]/$1 million} − 1
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Question: A European investor can earn a 4.75 percent annual interest rate in Europe or 2.75 percent per year in the United States. If the spot exchange rate is $1.58 per euro, at what one-year forward rate would an investor be indifferent between the U.S. and Japanese investments?
Answer: $1.5498

(1.0275/1.0475) × $1.58 = $1.5498
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Question: The spot rate for the Argentine peso is $0.3600 per peso. Over the year, inflation in Argentina is 10 percent and U.S. inflation is 4 percent. If purchasing power parity holds, at year-end the exchange rate should be approximately ______________ dollars per real.
Answer: 0.3384

[(4% − 10%) × 0.36] + (0.36) = 0.3384
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Question: A current account deficit implies that
Answer: more goods and services are imported than are exported.
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Question: You can buy or sell the yen spot at ¥102 to the dollar. You can buy or sell the yen one-year forward at ¥104 to the dollar. If U.S. annual interest rates are 4 percent, what must be the approximate one-year Japanese interest rate if interest rate parity holds?
Answer: 6.04 percent

Using IRPT: 1 + 0.04 = (1/(1/102)) (1 + iJ ) × 1/104 and solve for iJ = 6.039%.
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