1.

Vertical foreign direct investment is undertaken for the purpose of exploiting raw
materials or to be nearer to the consumers through the acquisition of distribution outlets.

Select one:
a. False
b. True

2. According to the industrial organization hypothesis, when a firm establishes a subsidiary in

Select one:
a. True
b. False

3. The relation between multinationals (or transnational) and foreign direct investment is very
simple: firms become multinational (or transnational) when they undertake foreign direct
investment.

Select one:
a. False
b. True

4. The central banks of countries act as intermediaries between the true sellers and buyers of
currencies, such as governments, businesses, and individuals.

Select one:
a. False
b. True

5. Assume that the interest rate parity holds between the U.S. and England. Then the rate of
return on the British (foreign) investment:

Select one:
a. is negatively related to the U.S. interest rate.
b. is positively related to the expected dollar/pound exchange rate.
c. is negatively related to the British interest rate.
 d. is negatively related to the expected dollar/pound exchange rate.

6. Suppose the exchange rate E$/¥ = 0.01172 today. This means you would need approximately
¥1,706.4 to buy $200 at this exchange rate.

Select one:
a. False
b. True

7. Factors that determines import substitution FDI includes, the size of the host country’s market,
transportation cost and trade barriers.

Select one:
a. False
b. True

8. If the British interest rate is 3 percent, E $/₤ = 1.6, while Ee$/₤= 1.45 (next year), then it is
inadvisable to invest in a British certificate of deposit that will mature in a year’s time.

Select one:
a. False
b. True

9. The higher the value of the pound against the dollar:

Select one:
a. the higher the rate of return on pound-denominated assets.
b. the lower the British nominal interest rate.
c. the higher the demand for pound by investors.
d. the greater its supply in the Forex market.

10. Suppose the euro/Australian dollar exchange rate increases from 0.65 to 0.70 within a short
period. Meanwhile, the Mexican peso/euro exchange rate rises from 15.71 to 16.27 during the
same period. Identify the correct statement from the following.

Select one:
a. The euro has appreciated against the peso and depreciated against the Australian dollar.
b. The euro has depreciated against both the Australian dollar as well as the peso.
c. The euro has appreciated against both the Australian dollar as well as the peso.
 d. The Australian dollar has depreciated against the euro.

11. Suppose interest rate parity holds between the U.S. and England. If the Bank of England
reduces the domestic interest rate, all other things being equal the British investors will shift
funds from American investments to domestic investments.

Select one:
a. True
b. False

12. Which of the following statements is true about hedging?

Select one:
a. It protects the hedger from a downside loss
b. It assures a gain to the hedger
c. It is beneficial for a buyer when the currency appreciates
d. It eliminates exchange rate risk completely

13. Which of the following statements is true regarding the rate of return on foreign asset?

Select one:
a. If the expected exchange rate is same as the spot rate, the rate of return will be lower than
the foreign interest rate.
b. If the domestic currency is expected to depreciate, the rate of return on the foreign asset
will be lower than the foreign interest rate.
c. If the domestic currency is expected to appreciate, the rate of return on the foreign asset
will be lower than the foreign interest rate.
d. If the expected exchange rate is same as the spot rate, the rate of return will be lower than
the foreign interest rate.

14. Suppose the 1 Singapore dollar (SGD) = 62.87 yen. If this increases to 63.42 yen in a few
months, we can conclude that:

Select one:
a. Japanese goods and services are becoming more expensive.
b. the yen is appreciating against the SGD.
c. the SGD has appreciated by 0.87 percent.
d. the investors are demanding more yen in the Forex market.

15. Portfolio diversification hypothesis relaxes the risk neutrality assumption under differential
rate of return hypothesis.
Select one:
a. True
b. False

16. Portfolio diversification hypothesis relaxes the risk neutrality assumption under differential
rate of return hypothesis.

Select one:
a. True
b. False

17. Suppose the spot exchange rate E€/$ = 1.25. However, the expected exchange rate in a year’s
time is Ee€/$ = 1.7. This implies that investors expect the dollar to appreciate.

Select one:
a. False
b. True

18. Suppose Frank invests $7,000 in a domestic asset for a year. The amount returned to him
after a year is 9 percent higher than what he had invested. This 9 percent is _____.

Select one:
a. the foreign interest rate
b. the domestic inflation rate
c. the interest rate that banks charge on their loans
d. the rate of return on his investment

19. A decrease in the expected exchange rate E$/£e causes:

Select one:
a. an increase in the rate of return on pound in the short run.
b. an increase in the rate of return on dollar in the short run.
c. a pound depreciation and a dollar appreciation.
d. a decrease in the rate of return on pound in the long run.

20. A key concern of investors is how to manage the trade-off between debt and equity.
Select one:
a. True
b. False

21. When the investor’s expected appreciation of the Japanese yen against the dollar falls, it
implies that the rate of return will decline.

Select one:
a. True
b. False

22. can be used to reduce exchange rate risk.

Select one:
a. A forward premium
b. Arbitrage
c. The spot exchange rate
d. A forward contract

23. Purchasing Canadian dollars in Canada’s Forex market and then selling them later in
England, once the Canadian dollar has appreciated, can be described as a forward transaction.

Select one:
a. True
b. False

24. Suppose an importer, who expects to receive his shipment of raw materials worth €15,000 in
three months, enters into a forward contract where E€/$ is 0.80. If at the time of delivery of the
raw materials E€/$ = 0.83, how much does the trader benefit/lose by entering into the forward
contract?

Select one:
a. He loses by $677.71
b. He loses by $450
c. He gains by $677.71
d. He gains by $450
25. Suppose Julio, an Argentine, is considering two investment options: an Argentine certificate
of deposit (CD) and a U.S. CD. The domestic interest rate in Argentina is 2 percent. Meanwhile,
the rate of return from a U.S. CD works out to 5 percent. This implies that Julio should invest in
the American CD.

Select one:
a. False
b. True

26. Suppose Joey wants to invest $3,000 for a year in a German certificate of deposit that
promises a 9 percent interest. If the spot exchange rate E €/$ = 1.25, he is investing €2400 in the
CD.

Select one:
a. False
b. True

27. Suppose E₤/$ = 0.64, while a year from now, Ee₤/$ is likely to be equal to 0.5. This means that
the pound is expected to depreciate over the next 12 months.

Select one:
a. False
b. True

28. When the foreign rate of interest increases, All other things being equal, the domestic rate of
return falls short of the foreign rate of return before the adjustment to the new Forex equilibrium
begins.

Select one:
a. True
b. False

28. Suppose the equilibrium value of E $/¥ = 95. If the spot exchange rate for some reason is
higher at 98, it can be assumed that the domestic rate of return is lower than the Japanese rate of
return.

Select one:
 a. True
b. False

29. Suppose the interest rate parity holds between the euro and the pound. If the European
Central Bank announces an increase in interest rate, ceteris paribus, which of the following will
be true?

Select one:
a. The British investors will be indifferent to this decision.
b. The British investors will reduce the supply of pounds in the Forex market.
c. The demand for pounds will exceed its supply in the Forex market.
d. The European investors will shift funds to domestic assets.

30. Suppose interest rate parity holds between the U.S. and Germany. If, all other things being
equal, the U.S. central bank increases the domestic interest rate in an attempt to reduce inflation
it will lower the dollar/euro exchange rate to a new equilibrium.

Select one:
a. True
b. False

31. Which of the following statements is true about the Forex market and its participants?

Select one:
a. Businesses act as intermediaries between the sellers and buyers of currencies.
b. The governments of countries act as intermediaries between the sellers and buyers of
currencies.
c. The exchange rate will be determined independently by each bank but will essentially be
determined by supply and demand in the market.
d. The exchange rate is determined by the central bank for all countries.

32. When the domestic currency is expected to depreciate the rate of return on the foreign asset
will exceed the domestic interest rate.

Select one:
a. False
b. True
33. Each intermediary in the Forex market sets the exchange rate at each moment to equalize its
supply of foreign currency with the market demand.
Select one:
a. False
b. True

34. Bill, a U.S. citizen, is planning to invest in a U.S. certificate of deposit (CD) that offers an
interest rate of 4 percent. This means the rate of return on this investment is also 4 percent.

Select one:
a. False
b. True

35. If investors expect the value of the dollar to weaken against the euro, then the rate of return
on a French certificate of deposit will be higher than the interest rate prevailing in France.

Select one:
a. False
b. True

36. The rate of return on a foreign investment depends not only on the domestic interest rate but
also on the spot exchange rate and the foreign interest rate one year in the future.

Select one:
a. True
b. False

37. Jenn wants to invest in shares of foreign companies. As a rational investor, her only concern
before making the investment should be the rate of return from it.

Select one:
a. False
b. True

38. Suppose the spot exchange rate E$/₤ = 0.64 today. If this rises to 0.72 tomorrow, it will imply
that the U.S. dollar has appreciated against the British pound.

Select one:
a. True
 b. False

39. Assume that the interest rate parity holds between the U.S. and England. Ceteris paribus, a
decrease in the expected future $/£ exchange rate will:

Select one:
a. lead investors to shift investments to U.S. assets, and result in an increase in the $/£
exchange rate
b. lead investors to shift investments to U.S. assets, and cause an appreciation of the dollar.
c. lead investors to shift investments to British assets, and result in an increase in the $/£
exchange rate
d. lead investors to shift investments to British assets, and cause an appreciation of the dollar.

40. Overwhelming majority of FDI is made in the form of machinery, equipment and buildings,
often achieved via mergers & acquisitions.

Select one:
a. True
b. False

41. If the British interest rate is 4 percent, the spot exchange rate between the pound and the
dollar, E$/₤ = 1.6, while Ee$/₤= 1.75, then the British rate of return is 13.75 percent.

Select one:
a. True
b. False

42. If investor expectations change such that they now expect the yen to appreciate further
against the dollar, it will cause the rate of return on yen to shift to the right.

Select one:
a. False
b. True

43. The interest rate parity theory suggests that the actions of importers and exporters, whose
transactions are recorded on the current account, induce changes in the exchange rate.
Select one:
a. True
b. False

44. When the foreign interest rate is very low, the difference between the domestic and foreign
interest rate is approximately equal to the percentage change in the exchange rate.

Select one:
a. False
b. True

45. Suppose the Fed announces its intention of conducting an open market purchase of bonds.
This can cause an increase in the expected exchange rate E$/£e, which in turn will cause a pound
appreciation and a dollar depreciation.

Select one:
a. False
b. True

46. The expected rate of return on a British asset depends on two things, the British interest rate
and the expected percentage change in the value of the pound.

Select one:
a. True
b. False

47. Suppose the spot Yuan/dollar exchange rate is 6.79. Sue, a Chinese national, has 10,000
Yuan that she wants to invest in a U.S. asset that promises an annual interest of 7 percent. If the
expected exchange rate (Yuan/dollar) after a year is 7.2, calculate the rate of return Sue earns on
her investment.

Select one:
a. 0.9 percent
b. 6.04 percent
c. 5.6 percent
d. 13.46 percent

48. If the exchange rate E$/£ falls below the equilibrium, investors will shift funds to increase
investment in British assets.
Select one:
a. True
b. False

49. Identify the correct statement from the following.

Select one:
a. If $1 can buy £0.64, then it implies that £1 can buy $0.64.
b. The value of the Japanese yen in terms of dollar is the $/¥ exchange rate.
c. The value of a U.S. dollar in terms of British pounds is the $/£ exchange rate.
d. If $1= £0.64, then £1= $0.36
50. Foreign direct investment in its classic form is defined as a company from one country
making a physical investment into building a factory in another country.

Select one:
a. True
b. False

51. David is trying to decide whether to invest in a domestic certificate of deposit (CD) with a 5
percent interest, or to invest in a British CD bearing an interest of 4.5 percent. He knows that the
spot exchange rate E$/ € = 1.32, while the expected exchange rate a year from now is 1.4. If
David wants to invest $3,000 for a year, which option should he choose?

Select one:
a. He should invest in the domestic asset because the rate of return on the British asset is -
5.97 percent.
b. He should invest in the domestic asset because it bears a higher interest rate than the
British asset.
c. He should invest in the British CD because that is likely to yield a return of 11.4 percent.
d. He should invest in the British CD because that is likely to yield a return of 10.8 percent.

52. Consider an American investor considering both domestic and British investment options. If
the rate of return on a British asset is negative, it implies that:

Select one:
a. the American interest rate on a comparable asset is higher than the British interest rate.
b. the effect of the British interest rate on the return is stronger than that of the appreciation
of the pound.
 c. the depreciation of the pound has a stronger impact on the return than the British interest
rate.
d. the investors are expecting the dollar to depreciate.

53. If E$/€ = 1.28, then $1 will trade for:

Select one:
a. €1.28
b. €0.28
c. €1
d. €0.78

54. Suppose the exchange rate E$/¥ = 0.01172 today. How much yen would you need
(approximately) to buy $200 at this exchange rate?

Select one:
a. ¥2.344
b. ¥17,064.85
c. ¥11.72
d. ¥1,706.48

55. Suppose the Japanese interest rate is 0.03 percent. If the ROR¥ works out to be around -11.3
percent, after taking the Japanese interest rate, the spot yen-dollar exchange rate, and the
expected exchange rate into account, then it can be concluded that a Japanese investor would not
only earn nothing, but would lose money, if she purchased a Japanese certificate of deposit.

Select one:
a. False
b. True

56. When the forward exchange rate is such that a forward trade costs more than a spot trade
today costs, there is said to be an arbitrage.

Select one:
a. False
b. True

57. Consider an American investor considering both domestic and British investment options. If
the rate of return on a British asset is negative, it implies that:
Select one:
a. the effect of the British interest rate on the return is stronger than that of the appreciation
of the pound.
b. the American interest rate on a comparable asset is higher than the British interest rate.
c. there is excess demand for the pound in the Forex market.
d. the depreciation of the pound has a stronger impact on the return than the British interest
rate.

58. Which of the following statements is true regarding the rate of return on foreign asset?

Select one:
a. If the domestic currency is expected to depreciate, the rate of return on the foreign asset
will be lower than the foreign interest rate.
b. If the domestic currency is expected to appreciate, the rate of return on the foreign asset
will be lower than the foreign interest rate.
c. If the expected exchange rate is same as the spot rate, the rate of return will be lower than
the foreign interest rate.
d. If the expected exchange rate is same as the spot rate, the rate of return will be lower than
the foreign interest rate.

59. The yen/dollar exchange rate fell from just over ¥92/dollar in June 2010 to ¥84.7/dollar in
August 2010. Meanwhile, the value of the greenback vis-à-vis the euro changed from $1.19/euro
in June to $1.29/euro in August. This means the dollar appreciated with respect to both the yen
and the euro.

Select one:
a. True
b. False

60. Assume that the interest rate parity holds between the U.S. and England. Then the rate of
return on the British (foreign) investment is negatively related to the expected dollar/pound
exchange rate.

Select one:
a. False
b. True

61. Currency transactions by which of the following groups is included in the current account?
Select one:
a. Mutual funds
b. Banks
c. Tourists
d. Insurance companies

62. Suppose the Mexican government reduces the domestic interest rate to encourage domestic
consumption. All other things being equal, this disturbs the interest rate parity between the return
on the U.S. and Mexican assets and causes the dollar to appreciate against the peso.

Select one:
a. False
b. True

63. The rate of return on a foreign investment depends not only on the _____ but also on the spot
exchange rate and the _____ one year in the future.

Select one:
a. foreign interest rate; expected exchange rates
b. domestic interest rate; foreign interest rate
c. expected exchange rate; domestic inflation rate
d. expected exchange rate; foreign inflation rate

64. Suppose the spot Yuan/dollar exchange rate is 6.79. Sue, a Chinese national, has 10,000
Yuan that she wants to invest in a U.S. asset that promises an annual interest of 7 percent.
Calculate the amount she will earn in dollars after a year.

Select one:
a. $1,472.75
b. $1,575.85
c. $72,653
d. $67,900

65. Suppose the equilibrium value of E $/¥ = 95. If the spot exchange rate for some reason is
higher at 98, demand for the dollar will increase in the Forex market.

Select one:
a. False
b. True
66. Suppose Joey wants to invest $3,000 for a year in a German certificate of deposit that
promises a 9 percent interest. If the spot exchange rate E $/€ = 0.80, then he will earn $3937.5 on
maturity.

Select one:
a. False
b. True

67. Suppose an importer, who expects to receive his shipment of raw materials worth €15,000 in
three months, enters into a forward contract where E€/$ is 0.80. If at the time of delivery of the
raw materials E€/$ = 0.83, this means the trader gains by $677.71 by entering into the forward
contract.

Select one:
a. False
b. True

68. Purchasing Canadian dollars in Canada’s Forex market and then selling them later in
England, once the Canadian dollar has appreciated, can be described as _____.

Select one:
a. a forward premium
b. currency arbitrage
c. a forward contract
d. hedging

69. Consider a U.S. trader who will receive a shipment of raw materials from a Mexican
supplier. However, he expects the dollar to depreciate by the time the shipment reaches him. If
the current spot exchange rate is $1 = 12.66 Mexican peso, identify the correct statement form
the following.

Select one:
a. The trader should use the spot exchange rate prevailing at the time of receiving the
shipment of raw materials to make his payments to the Mexican suppliers.
b. The trader is likely to benefit if he enters into a forward contract.
c. The U.S. trader will earn a forward premium by entering into a forward contract, if his
expectations about the dollar’s value are realized.
d. The Mexican supplier is likely to benefit if he enters into a forward contract.
70. Suppose a Japanese investor has ¥50,000 to invest for a year. He has the following
information to help him choose between a Japanese certificate of deposit and an Indian
certificate of deposit. The Indian currency, rupee, is denoted here by R.

ER/¥ = 0.545, EeR/¥ = 0.452

iR = 6 percent, i¥ = 2 percent

Identify the correct statement from the following.

Select one:
a. He will invest the money in the Japanese CD because the return on the Indian investment
is -12.09 percent.
b. He will invest in the Indian CD because the rate of return is likely to be 24.09 percent.
c. He will invest in the Indian CD because the rate of return is likely to be 27.78 percent.
d. He will invest in the Japanese CD because the rate of return on the Indian CD is likely to
be -15.4 percent.

71. The flow of FDI refers to the amount of FDI undertaken over a given time period (e.g., a
year) whilst the stock of FDI refers to the total accumulated value of foreign-owned assets at a
given time (which takes into account possible divestment along the way).

Select one:
a. False
b. True

72. The terms ‘long-term’, ‘control’ and ‘controlling-interest’ distinguishes portfolio investment
from foreign direct investment since a foreign direct seeking investor does not seek control or a
lasting interest.

Select one:
a. True
b. False

73. A decrease in the expected exchange rate E$/£e causes an increase in the rate of return on
pound in the short run.

Select one:
a. False
 b. True

74. Suppose the spot Yuan/dollar exchange rate is 6.79. Sue, a Chinese national, has 10,000
Yuan that she wants to invest in a U.S. asset that promises an annual interest of 7 percent. This
means the amount she will earn in dollars after a year will be $1,575.85.

Select one:
a. False
b. True

75. When the domestic currency is expected to depreciate:

Select one:
a. the rate of return will be equal to the foreign interest rate.
b. the rate of return on the foreign asset will exceed the domestic interest rate.
c. the rate of return on the foreign asset will fall short of the foreign interest rate.
d. the rate of return on the foreign asset will exceed the foreign interest rate.

76. If the interest rate parity holds between the U.S. and England, then the difference between the
domestic interest rate, i$, and the foreign interest rate, i£, must always be equal to:

Select one:
a. i£ (E$/£ -Ee$/£)/ E$/£
b. (1+ i£)(Ee$/£ -E$/£)/ E$/£
c. (1+ i£)(E$/£ -Ee$/£)/ E$/£
d. i£ (Ee$/£ -E$/£)/ E$/£

77. The rate of return on the foreign deposit is _____ related to changes in the foreign interest
rate and the _____ and _____ related to the spot foreign currency value.

Select one:
a. negatively; expected domestic currency value; positively
b. positively; expected foreign currency value; negatively
c. negatively; expected foreign currency value; negatively
d. positively; expected domestic inflation rate; negativel

78. If E$/₤ = 1.6, and Ee$/₤ in a year’s time is 1.75, then the return from the appreciation of the
pound is 9.4 percent approximately.

Select one:
 a. True
b. False

79. According to the market size hypothesis, capital flow from countries with low rates of return
to those with high rates of return until equality is realized.

Select one:
a. True
b. False

80. According to the interest rate parity theory interest rates must equalize across countries when
the exchange rates are floating.

Select one:
a. False
b. True