George Washington University

IFE 2201

HW 4

1)Suppose the yen per dollar exchange rate is 100. The dollar price of a Japanese stereo system of worth 60,000 yen is:

A. $1,667.

B. $600.

C. $6,000.

D. $100.

2. Suppose the dollar per pound exchange rate is $2 per pound while the dollar per Swiss franc exchange rate is 50 cents per franc. From the given information we can conclude that the Swiss franc per pound exchange rate is:

1. 1. 1 franc per pound.
   2. too low.
   3. too high.
   4. 4 francs per pound.

3. Rapid increases in the U.S. exports of goods and services will result in a(n)            foreign currency and a(n) the U.S. dollars in the foreign exchange market.

1. 1. increase in the demand for; increase in the supply of
   2. increase in the supply of; increase in the demand for
   3. shortage of; surplus of
   4. decrease in the supply of; decrease in the demand for

4. In the foreign exchange market, what could be a possible consequence of an increase in the purchase of stocks of Toyota, a Japanese automobile firm, by the U.S. residents?

1. 1. Demand for dollar will increase
   2. Yen will depreciate
   3. Dollar will depreciate
   4. Supply curve for dollar will shift to the left

5. As the value of the yen falls relative to the U.S. dollar in the foreign exchange market:

1. 1. Japanese goods become more expensive to the U.S. consumers.
   2. the supply of dollars will fall.
   3. the demand for Japanese goods will increase in the U.S. market.
   4. U.S. goods become less expensive to Japanese consumers.

The figure given above illustrates the market for British pounds. D≤ and S≤ are the dem curves of the British pounds respectively.

nd and supply

6. In Figure 17.1, at an exchange rate of $2.50 per pound, there is an:

1. 1. excess demand for 1 million pounds.
   2. excess supply of 1 million pounds.
   3. excess demand for 0.5 million pounds.
   4. excess supply of 0.5 million pounds.

7. In Figure 17.1, if the exchange rate is pegged at $2.50 per pound:

1. 1. the pound will be overvalued.
   2. the pound will be undervalued.
   3. the British goods will become cheap in U.S. markets.
   4. the demand for the American goods will fall in British markets.

8. Assume you are a Chinese exporter and expect to receive $250,000 at the end of 60 days. You can remove the risk of loss due to a devaluation of the dollar by:

1. 1. selling dollars in the 60-day forward exchange market.
   2. buying dollars now and selling these dollars at the end of 60 days.
   3. selling the yuan equivalent in the forward exchange market for 60-day delivery.
   4. keeping the dollars in the United States after they are delivered to you.

9. If the spot price of the euro is $1.10 per euro and the 30-day forward rate is $1.00 per euro, and you believe that the spot rate in 30 days will be $1.05 per euro, then you can try to maximize speculative gains by:

1. 1. buying euros in the current spot market and selling euros in 30 days at the future spot rate.
   2. signing a forward foreign exchange contract to sell euros in 30 days.
   3. signing a forward foreign exchange contract to sell dollars in 30 days.
   4. buying dollars in the spot market and selling the dollars in 30 days at the future spot rate.

10. For an investor who starts with dollars and wants to end up with dollars in the future, which of the following choices is an example of a covered international investment?

1. 1. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy the foreign currency
   2. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy dollars
   3. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and then buy dollars at the future spot rate
   4. Buy a dollar-denominated financial asset

Scenario 18.1

Suppose the interest rate on 6-month treasury bills is 7 percent per year in the United Kingdom and 4 percent per year in the United States. Also, today's spot exchange price of the pound is $2.00 while the 6-month forward exchange price of the pound is $1.98.

11. Refer to the Scenario 18.1. By investing in U.K. treasury bills rather than U.S. treasury bills, and covering exchange-rate risk, U.S. investors earn an approximate extra return for 6 months of:

1. 1. 0.5 percent.
   2. 1.5 percent.
   3. 3.0 percent.
   4. 4.0 percent.

12. Refer to the Scenario 18.1. Consider the expected future spot rate of pounds is $2.04. By investing in

U.K. treasury bills rather than U.S. treasury bills, and NOT covering exchange-rate risk, the approximate extra return earned by U.S. investors for 6 months will be:

1. 0.5 percent.
2. 5.0 percent.
3. 3.0 percent.
4. 3.6 percent.