2. Answer the following multiple choice questions (No explanation needed just choose the right answer) - Total mark 6 ( 1 mark each)

1. The BOP is often misunderstood as many people infer from its name that it is a balance sheet, whereas in fact it is a cash flow statement.

True

False

2. Assume that the forward rate is used to forecast the spot rate the U.S. dollar. The forward rate of the U.S. dollar contains a 5% discount. Today's spot rate of the U.S. dollar is .6625. The spot rate forecasted for one year ahead is:

1. 0.6956
2. .6625
3. 0.6294
4. 0.6650

3. If Interest Rate Parity (IRP) did not hold, then it would be possible for an astute trader to make unlimited amounts of money exploiting the arbitrage opportunity.

True

False

4. Assume the spot rate of the euro () is $0.85 today. The spot rate was $0.90 one year ago. This percentage change reflects :

1. about 5.56% appreciation of the euro
2. about 5.56% depreciation of the dollar
3. about 5.56% depreciation of the euro

5. If the direct exchange rate of the euro is worth $1.15, what is the indirect rate of the euro? That is, what is the value of a dollar in euros?

1. about 0.9696 dollars
2. about 0.8696 dollars
3. about 0.8996 euros
4. about 0.8696 euros

6. Arbitrage opportunities will be more frequent in an efficient market.

True

False