1. According to the Impossible Trinity:

1. Countries that adopt a floating exchange rate are never able to combat domestic economic weakness.
2. Countries that permit the free flow of capital in and out of the country must have domestic monetary policy independence.
3. Countries with fixed exchange rates can have both the free movement of capital in and out of the country and domestic monetary policy independence.
4. Countries with domestic monetary policy independence and the free flow of capital in and out of the country must have currencies that float in the FX market.

2. A US corporation has CNY 1,000,000 account payable due in 6 months. To hedge its currency risk your company enters into an NDF contract. The current spot rate is CNY 7.15/$, NDF contract rate is CNY 7.00/$, and the spot rate 6 months from today is CNY 7.25/$.

a) Your company pays $1,929.11

b) Your company receives $1,929.11

c) Your company receives $4,926.11

d) Your company pays $4,926.11

3. Which of the following is true?

1. An undervalued fixed rate currency encourages inflation in that country.
2. An overvalued currency increases a countrys exports.
3. An overvalued currency is a sign of a trade surplus for that country.
4. An undervalued currency is a sign of an excess supply of that currency.

4. Which of the following transactions is/are true in the US BOP account?

1. A Chinese company buys US Treasury securities from broker/dealer in Sydney, Australia.
2. An Italian family flies United Airlines to New York.
3. A US investment bank buys a German stock from a US insurance company.
4. A Spanish mutual fund sells Chinese companys stock to NY investment bank.
5. A US company sells a factory in Malaysia to a Chinese bank.

1. II and V
2. I and II
3. II, IV and V
4. III and V