NOTE: IF YOU ARENT GOING TO ANSWER THE MULTIPLE CHOICES THEN DONT SOLVE THE QUESTION. DONT BE AN ASS.

Which one of the following is True?

- According to interest rate parity, the interest rate differential must be equal to the differential between forward and spot exchange rates?

- Forward contracts are standardized contracts sold in organized exchanges?

- If real interest rates are different across countries, investors will shift their money into countries with high real interest rates?

Multiple choice:

- Which one of the following is correct when foreign currency is bought in the forward market?

• A fixed amount is paid when initiating the contract.

• A fixed amount is paid at the end of the contract.

• The amount to be paid is determined and paid at the end of the contract.

• The amount to be paid is determined periodically and paid in installments during the contract.

- A firm must make a large future payment in a foreign currency and wants to hedge the associated exchange rate risk. Which one of the following identifies the cost of such a hedge?

• difference between expected and current spot rates

• difference between expected and current forward rates

• difference between the forward premium and the forward discount

• difference between the forward rate and the expected future spot rate

- Assume the current spot price is USD1.32 = GBP1 and the 3-month forward rate is USD1.34 = GBP1. Which one of these statements is correct given these rates?

• The pound is selling at a forward premium relative to the dollar.

• The real interest rate in the U.S. is higher than the real rate in the U.K.

• The dollar is expected to appreciate.

• The dollar is selling at a forward premium relative to the pound.

-The spot exchange rate for the British pound is USD1.30 = GBP1. The annual inflation rate in the U.S. is 2% compared with 4% in the U.K. What is the anticipated exchange rate at the end of the year if purchasing power parity is valid?

• USD1.28 = GBP1

• USD1.39 = GBP1

• USD1.51 = GBP1

• USD1.63 = GBP1

-The main purpose in contracting to purchase foreign currency in the forward market is to:

• earn a premium on the exchange.

• lock into a future currency price now.

• take advantage of future price reductions.

• avoid the more expensive spot rates.

- How many dollars will it take for a U.S. citizen to purchase a Japanese product priced at 60,000 yen if the indirect exchange rate is JPY104 = USD1?

• $577

• $700

• $5,769

• $62,400