31 When a country must make a net payment to foreigners because of a balance-of-payments deficit, the central bank of the country a) Should do nothing
b) Should run down its official reserve assets (e.g. gold, foreign exchanges, and SDRs)
c) Should borrow anew from foreign central banks. d) b) or c) will work Answer: d.
32 Continued U.S. trade deficits coupled with foreigners’ desire to diversify their currency holdings away from U.S. dollars
a) could further diminish the position of the dollar as the dominant reserve currency b) could affect the value of U.S. dollar (e.g. through the currency diversification decisions of Asian central banks)
c) Could lend steam to the emergence of the euro as a credible reserve currency d) All of the above Answer: d.
33 Currently, international reserve assets are comprised of
a) gold, platinum, foreign exchanges, and special drawing rights (SDRs)
b) gold, foreign exchanges, special drawing rights (SDRs), and reserve positions in the International Monetary Fund (IMF)
c) gold, diamonds, foreign exchanges, and special drawing rights (SDRs) d) reserve positions in the International Monetary Fund (IMF), only Answer: b
34 International reserve assets include ―foreign exchanges‖. These are a) Special Drawing Rights (SDRs) at the IMF
b) reserve positions in the International Monetary Fund (IMF) c) Foreign currency held by a country’s central bank d) None of the above Answer: c
35 The most important international reserve asset, comprising 94 percent of the total reserve assets held by IMF member countries is a) Gold
b) Foreign exchanges
c) Special Drawing Rights (SDRs)
d) Reserve positions in the International Monetary Fund (IMF) Answer: b.
36 The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the identity for a country with a pure flexible exchange rate regime a) BCA + BKA + BRA = 0 b) BCA = –BKA
c) BCA + BKA = –BRA d) BRA = –BCA Answer: b
37 National income, or Gross National Product is given by:
a) GNP = Y = C + I + G + X + M b) GNP = Y = C + I + G + X – M c) GNP = I = C + Y + G + X – M d) GNP = Y = C + I + X + M – G Answer: b.
38 Which of the following is a true statement? a) BCA ≡ X – M b) BKA ≡ X – M
c) BKA – BCA ≡ X – M d) BKA ≡ X – M Answer a
39 There is an intimate relationship between a country’s BCA and how the country finances its domestic investment and pays for government expenditures. This relationship is given by BCA ≡ X – M ≡ (S – I) + (T – G). Given this, which of the following is a true statement?
a) If (S – I) < 0, it implies that a country’s domestic savings is insufficient to finance domestic investment.
b) If (T – G) < 0, it implies that a country’s tax revenue is insufficient to finance government spending c) both a) and b) are true d) none of the above Answer c
40 There is an intimate relationship between a country’s BCA and how the country finances its domestic investment and pays for government expenditures. This relationship is given by BCA ≡ X – M ≡ (S – I) + (T – G). Given this, which of the following is a true statement?
a) If (S – I) < 0, it implies that a country’s domestic savings is insufficient to finance domestic investment.
b) If (T – G) < 0, it implies that a country’s tax revenue is insufficient to finance government spending
c) when BCA is negative, it implies that government budget deficits an/or part of domestic investment are being finance with foreign-controlled capital d) all of the above are true Answer d.
41 There is an intimate relationship between a country’s BCA and how the country finances its domestic investment and pays for government expenditures. This relationship is given by BCA ≡ X – M ≡ (S – I) + (T – G). Given this, in order for a country to reduce a BCA deficit, which of the following must occur?
a) For a given level of S and I, the government budget deficit (T – G) must be reduced
b) For a given level of I and (T – G), S must be increased c) For a given level of S and (T – G), I must fall
d) All of the above would work to reduce a BCA deficit Answer d.
42 The spot market
a) Involves the almost-immediate purchase or sale of foreign exchange. b) Involves the sale of futures, forwards, and options on foreign exchange c) Takes place only on the floor of a physical trading floor d) All of the above. Answer: a)
43 Spot foreign exchange trading
a) accounts for about 5 percent of all foreign exchange trading b) accounts for about 20 percent of all foreign exchange trading c) accounts for about 35 percent of all foreign exchange trading d) accounts for about 70 percent of all foreign exchange trading Answer: d)
Spot Rate Quotations U.S. $ equiv. Currency per U.S. $ Country Tuesday Monday Tuesday Monday Britain (Pound) 1.6000 1.6100 0.625 0.6211 ￡62,500 1 Month 1.6100 1.6300 0.6211 0.6173 Forward 3 Months Forward 1.6300 1.6600 0.6173 0.6024 6 Months Forward 1.6600 1.7200 0.6024 0.5814 12 Months Forward 1.7200 1.8000 0.5814 0.5556 1 Using the table shown, what is the most current spot exchange rate shown for British pounds? Use a direct quote a) $1.61 = ￡1.00 b) $1.60 = ￡1.00 c) $1.00 = ￡0.625 d) $1.72 = ￡1.00 Answer: b)
44. The Singapore dollar—U.S. dollar (S$/$) spot exchange rate is S$1.60/$, the Canadian dollar—U.S. dollar (CD/$) spot rate is CD1.33/$ and the
S$/CD1.15. Determine the triangular arbitrage profit that is possible if you have $1,000,000. a) $44,063 profit b) $46,093 loss
c) No profit is possible d) $46,093 profit Answer: d)
Rationale: $1,000,000?S$1.60CD1.00$1???$1,046,093 $1S$1.15CD1.3345.The forward price
a) May be higher than the spot price b) May be the same as the spot price
c) May be less than the spot price d) All of the above Answer: d)
46.Relative to the spot price the forward price will be a) Usually less than the spot price b) Usually more than the spot price c) Usually equal to the spot price
d) Usually less than or more than the spot price more often than it is equal to the spot price. Answer: d)
47.For a U.S. trader working in American quotes, if the forward price is higher than the spot price
a) The currency is trading at a premium in the forward market b) The currency is trading at a discount in the forward market c) Then you should buy at the spot, hold on to it and sell at the forward—it’s a built-in arbitrage.
d) All of the above—it really depends if you’re talking American or European quotes Answer: a)
Rationale: d) is tricky and you will get some students lobbying hard for it—until you remind them to read the question carefully. 48. The forward market
a) Involves contracting today for the future purchase of sale of foreign exchange at the spot rate that will prevail at the maturity of the contract.
b) Involves contracting today for the future purchase of sale of foreign exchange at a price agreed upon today.
c) Involves contracting today for the right but not obligation to the future purchase of sale of foreign exchange at a price agreed upon today. d) None of the above Answer: b)
49. Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest for six months. You are considering the purchase of U.S. T-bills that yield 1.810% (that’s a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = ￥100, and the six month forward rate is $1.00 = ￥110. The interest rate in Japan (on an investment of comparable risk) is 13 percent. What is your strategy? a) take $1m, invest in U.S. T-bills
b) take $1m, translate into yen at the spot, invest in Japan, repatriate your yen earnings back into dollars at the spot rate prevailing in six months. c) take $1m, translate into yen at the spot, invest in Japan, hedge with a short position in the forward contract
d) take $1m, translate into yen at the forward rate, invest in Japan, hedge with a short position in the spot contract
Answer: c)
50. A U.S.-based currency dealer has good credit and can borrow $1,000,000 for one year. The one-year interest rate in the U.S. is i$ = 2% and in the euro zone the one-year interest rate is i