DAY 23

Section B
Mission CMA Part 2
Question: 1

A U.S. company took out a 12-month, 4% loan of £10,000 when the spot rate was $2 to £1.
At the end of the loan term, the spot rate was $2.10 to £1. What was the company’s
effective rate on this loan?

a. 0.95%
b. 4.00%
c. 9.20%
d. 5.60%

Question: 2

What is the effect on prices of U.S. imports and exports when the dollar depreciates?

a. Import prices will increase and export prices

b. Import prices and export prices will increase
c. Import prices will decrease and export prices will increase
d. Import prices and export prices will decrease.

Question: 3

An overvalued foreign currency exchange rate

a. A Represents a tax on exports and a subsidy to imports.

b. Represents a subsidy to exports and a tax on imports.
c. Has an effect on capital flows but no effect on trade flows.
d. Has no effect on capital flows but does affect trade flows.

Question: 4

If the dollar price of the euro rises, which of the following will occur?

a. The dollar depreciates against the euro.

b. The euro will buy fewer U.S. goods.
c. The euro will buy fewer European goods.
d. The euro depreciates against the dollar.

Question: 5

Suppose that Swiss wrist watches priced in Swiss francs become very popular among U.S.
consumers while Britain experiences relatively higher inflation than the United States at
the same time. Assuming that all other economic parameters remain constant, which one
of the following statements is most accurate?

a. The U.S. dollar will appreciate relative to the Swiss franc and depreciate relative to the
British pound.
b. The U.S. dollar will depreciate relative to the Swiss franc and appreciate relative to the
British pound.
c. The U.S. dollar will depreciate relative to both the Swiss franc and the British pound.
d. The U.S. dollar will appreciate relative to both the Swiss franc and the British pound.

Question: 6

If the exchange rate has changed from 1 U.S. dollar to 5 foreign currency units (FCUs) to a
rate of 1 U.S. Dollar to 5.5 FCU’s

a. the FCU has depreciated by 20%

b. the U.S. Dollar has depreciated by 10%
c. the FCU has appreciated by 20%
d. the U.S. dollar has appreciated by 10%

Question: 7

Assume the spot rate of the Canadian dollar is $.90. If the spot rate one year from now is
$.85, the Canadian dollar will have

a. Depreciated by 5.88%.
b. Depreciated by 5.56%.
c. Appreciated by 5.88%.
d. Appreciated by 5.56%.

Question: 8

If the annual U.S. inflation rate is expected to be 3%, and the Ptomanianptoma is expected
to depreciate against the U.S. dollar by 12%, a Ptomanian firm importing from its U.S.
parent can expect the ptoma costs of imports denominated in dollars to

a. Increase by about 17%.

b. Decrease by about 12%.
c. Decrease by about 5%.
d. Increase by about 3%
Question: 9

Of the following transactions, the one that would result in worsening the U.S. balance of
payments account is the

a. Buying of IBM shares by a Kuwaiti investor.

b. U.S. export of military equipment to Saudi Arabia.
c. Expenditure of a U.S. resident vacationing in France.
d. Receipt of dividends by an American corporation from its German subsidiary

Question: 10

What is the role of gold in the present international monetary system?

a. Gold is quoted in United States dollars only.

b. Gold is like any other asset whose value depends upon supply and demand.
c. Gold is the reserve asset of the International Monetary Fund.
d. All of the major currencies of the world, except the United States dollar, have a fixed
value in terms of gold.

Question: 11

Freely fluctuating exchange rates perform which of the following functions?

a. They eliminate the need for foreign currency hedging.

b. They make imports cheaper and exports more expensive.
c. They automatically correct a lack of equilibrium in the balance of payments.
d. They impose constraints on the domestic economy.

Question: 12

If consumers in Japan decide they would like to increase their purchases of consumer
products made in the United States, in foreign currency markets there will be a tendency
for

a. The supply of dollars to decrease.

b. The Japanese yen to appreciate relative to the U.S. dollar
c. The supply of dollars to increase.
 d. The demand for dollars to increase

Question: 13

Consider a world consisting of only two countries, Canada and Ruritania. Inflation in
Canada in 1 year was 5%, and in Ruritania 10%. Which one of the following statements
about the Canadian exchange rate (rounded) during that year will be true?

a. The Canadian dollar will appreciate by 5%.

b. The Canadian dollar will depreciate by 15%.
c. The Canadian dollar will depreciate by 5%.
d. Inflation has no effect on the exchange rates.

Question: 14

Which one of the following statements supports the conclusion that the U.S. dollar has
gained purchasing power against the Japanese yen?

a. The dollar is currently trading at a premium in the forward market with respect to the
yen.
b. The yen’s spot rate with respect to the dollar has just fallen.
c. Inflation has recently been higher in the U.S. than in Japan.
d. Studies recently published in the financial press have shed doubt on the interest rate
parity (IRP) theory.

Question: 15

When the U.S. dollar is expected to rise in value against foreign currencies, a U.S.
company with foreign currency denominated receivables and payables should

a. Slow down collection and slow down payments

b. speed collection and speed up payments
c. sped up collection and slow down payments
d. slow down collection and speed up payments

Question: 16

A firm in Australia imports chairs from Bangladesh and resells them in Australia for A$45
per unit. The firm placed an order for 1,000 chairs with the supplier in Bangladesh at a
cost of B$60 per unit. As per the terms of the agreement, payment is not required until
the goods arrive in 30 days. The current exchange rate is B$1.5753 for A$1. The firm
expects the exchange rate to decline to B$1.5500 for A$1. In order to manage short-term
exchange rate risk, the firm decides to hedge and lock in an exchange rate of B$1.5650 for
A$1. What would be the pre-tax profit from the sale of chairs?

a. A$6,660
b. A$6,290
c. A$6,910
d. A$9,585

Question: 17

The three generally acknowledged theories regarding currency exchange rates suggest all
of the following about high-inflation currencies except:

a. They will weaken over time.

b. Their economies will have high interest rates.
c. Their interest rates will converge over time.
d. They usually trade at large forward discounts.

Question: 18

Assuming exchange rates are allowed to fluctuate freely, which one of the following
factors would likely cause a nation’s currency to appreciate on the foreign exchange
market

a. A slower rate of growth in income than in other countries, which causes imports to lag
behind exports.
b. A high rate of inflation relative to other countries.
c. Domestic real interest rates that are lower than real interest rates abroad.
d. A relatively rapid rate of growth in income that stimulates imports.

Question: 19

A company has a foreign-currency-denominated trade payable, due in 60 days. In order to

eliminate the foreign currency exchange-rate risk associated with the payable, the
company could

a. Buy foreign currency forward today.

b. Sell foreign currency forward today.
c. Borrow foreign currency today, convert it to domestic currency on the spot market,
and invest the funds in a domestic bank deposit until the invoice payment date.
 d. Wait 60 days and pay the invoice by purchasing foreign currency in the spot market at
that time.

Question: 20

The interest-rate parity theorem states that

a. As nominal foreign interest rates increase, the forward exchange rate in units of the
foreign currency per dollar increases.
b. The exchange rate is equal to the market exchange rate.
c. A rise in the real interest rate will lead to a depreciation of currency.
d. Nominal interest rates decrease when inflation rates increase.

Question: 21

A company manufactures goods in Esland for sale to consumers in Woost land. Currently,
the economy of Esland is booming and imports are rising rapidly. Woost land is
experiencing an economic recession, and its imports are declining. How will the Esland
currency, $E, react with respect to the Woost land currency, $W?

a. Changes in imports and exports will not affect currency changes.

b. The $E will decline with respect to the $W.
c. The $E will remain constant with respect to the $W.
d. The $E will increase with respect to the $W.

Question: 22

The purchasing-power parity exchange rate

a. Is always equal to the market exchange rate.

b. Is a fixed (pegged) exchange rate.
c. Holds constant the relative price levels in two countries when measured in a common
currency.
d. Results in an undervalued currency of countries that are net importers.

Question: 23

A short-term speculative rise in the world-wide value of domestic currency could be

moderated by a central bank decision to

a. Increase domestic interest rates.

 b. Sell domestic currency in the foreign exchange market.
c. Buy domestic currency in the foreign exchange market.
d. Sell foreign currency in the foreign exchange market.

Question: 24
If the annual U.S. inflation rate is expected to be 5% while the euro is expected to depreciate
against the U.S. dollar by 10%, an Italian firm importing from its U.S. parent can expect its
euro costs for these imports to

a. Increase by about 5%.

b. Increase by about 16.7%.
c. Decrease by about 5%.
d. Decrease by about 10%.

Question: 25

An American importer of English clothing has contracted to pay an amount fixed in British
pounds 3 months from now. If the importer worries that the U.S. dollar may depreciate
sharply against the British pound in the interim, it would be well advised to

a. Buy dollars in the futures market

b. Sell pounds in the forward exchange market
c. Buy pounds in the forward exchange market
d. Sell dollars in the futures market.