Quick Quiz 1

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1		__________ explains the absolute level of the exchange rate.
			A)	The forward exchange rate
			B)	The International Fisher effect
			C)	Absolute purchasing power parity
			D)	Relative purchasing power parity
			E)	The Fisher effect
2		On March 1st, you make plans to travel to Japan the following summer. The spot rate for the yen is $.02. Since it will be a short trip, you believe $10,000 in spending money will be sufficient. On July 1st, the spot rate for yen is $.01. As a result, your $10,000 will buy:
			A)	Half as many yen as you had planned.
			B)	Twice as many yen as you had planned.
			C)	20 percent more yen than you had planned.
			D)	20 percent fewer yen than you had planned.
			E)	Exactly as many yen as before, since you planned ahead.
3		Which of the following describes a translation exposure of exchange rate risk? I.Your firm buys plumbing products in Asia and sells them in Canada at a substantial discount to plumbing products manufactured in Canada. However, the strengthening economies in Asia have increased Asian demand for their own plumbing products, pushing up local prices and damaging your ability to undercut your Canadian competitors. II. Your firm has subsidiaries throughout the world. Due to the recent depreciation of the dollar against most foreign currencies, the dollar value of your foreign sales has declined as reflected on the parent's financial statements, even though sales growth is strong. III.You sell custom-designed refrigerators in Canada. The refrigerators are manufactured in Mexico and it takes about 60 days from the time you agree to a sale and accept payment in Canada until you take delivery of the refrigerator and pay the Mexican firm. Your profit, therefore, is affected by changes in the dollar/peso exchange rate between the order and delivery dates.
			A)	I and II only
			B)	I, II and III only
			C)	III only
			D)	II only
			E)	I only
4		Suppose that the nominal risk-free rate of interest in Canada is 5%. The nominal risk-free rate in Germany is 8% with inflation of 6%. What is the approximate inflation rate in Canada?
			A)	3.0%
			B)	2.0%
			C)	6.8%
			D)	5.0%
			E)	4.0%
5		Suppose the current spot rate between the British pound and the Canadian dollar is £0.4810 per $1.00. Expected inflation in Britain is 8% and expected inflation in Canada is 5%. What is the expected exchange rate in one year from now if relative purchasing power parity holds?
			A)	£0.4666 £ per $1.00
			B)	£0.4954 £ per $1.00
			C)	£0.5120 £ per $1.00
			D)	£0.5187 £ per $1.00
			E)	£0.5340 £ per $1.00
6		The current spot rate between Australian dollars and Canadian dollars is A$1.015 per $1.00. The rate on Canadian T-bills is 5% and the rate on an Australian risk-free security is 10%. What is the approximate 2-year forward rate if interest rate parity holds?
			A)	A$0.968 per $1.00
			B)	A$1.004 per $1.00
			C)	A$1.342 per $1.00
			D)	A$1.136 per $1.00
			E)	A$1.119 per $1.00
7		Suppose absolute purchasing power parity holds. The exchange rate between British pounds and Canadian dollars is £0.4825 per dollar. If a computer costs $2,995 in Canada, how much should it cost in Britain?
			A)	£6,207
			B)	£2,995
			C)	£1,576
			D)	£1,445
			E)	£1,180

Use the following information to answer the next three questions.

	Canadian $ Equivalent	Currency per $
Brazil (Real)	0.9377	1.06644
France (Franc)	0.1731	5.77701
Germany (Mark)	0.7858	1.27259

8		How many French Francs can you buy with $200?
			A)	FF 35
			B)	FF 984
			C)	FF 1,049
			D)	FF 1,155
			E)	FF 1,224
9		A Mercedes costs DM153,636. How expensive is the car in Canadian dollars?
			A)	$98,600
			B)	$153,636
			C)	$120,727
			D)	$144,768
			E)	$195,515
10		How many Brazilian Reals are needed to buy one German mark?
			A)	0.838
			B)	0.456
			C)	0.353
			D)	1.601
			E)	1.193