University of San Carlos - Main Campus

ACCTG 509

Chapter 9

True/False Questions

1)If a foreign currency appreciates, that country's goods and services become relatively more expensive for U.S. buyers.

2. A U.S. firm agrees to import textiles from Hong Kong and pay in 90 days. The invoice requires payment in Hong Kong dollars. The U.S. importer could hedge this currency risk by buying the HK dollar forward.

3. The principle currency futures market in the U.S. is the IMM in Chicago.

4. London is the largest center for trading foreign exchange.

5. If you can convert 150 Swiss francs to $90 the exchange rate is 1.67 francs per dollar.

6. If the dollar is initially worth 120 yen and then the exchange rate changes so that the dollar is now worth 115 yen, the value of the yen has depreciated.

7. If the euro per yen ratio falls the value of the yen has risen.  

8. If the U.S. has inflation of 3% and Europe has inflation of 5%, the value of the Euro should increase, ceteris paribus.

9. A U.S. bank has £12 million worth of loans and £10 million worth of deposits in Britain. The bank would benefit from a drop in the value of the pound against the dollar.

10. A country with a current account surplus is importing more goods and services than they are exporting.

Multiple Choice Questions

11. Foreign exchange trading in 2001 averaged about                      per day.
    1. $101 million
    2. $1.1 billion
    3. $101 billion
    4. $1.1 trillion
    5. $101 trillion

12. In 2001, the U.S. imported goods and services worth about                                            and exported about

                         leading to a current account                                    .

1. 1. $1.3 trillion ; $1.6 trillion ; deficit
   2. $1.3 trillion ; $1.6 trillion ; surplus
   3. $1.3 trillion ; $1.3 trillion ; balance
   4. $1.6 trillion ; $1.3 trillion ; deficit
   5. $1.6 trillion ; $1.3 trillion ; surplus

13. A U.S. investor has borrowed pounds, converted them to dollars and invested the dollars in the U.S. to take advantage of interest rate differentials. To cover the currency risk the investor should
    1. Sell pounds forward
    2. Buy dollars forward
    3. Buy pounds forward
    4. Sell pounds spot
    5. None of the above

14. A U.S. firm has £50 million in assets in Britain. They could hedge this risk by
    1. Buying pounds forward
    2. Selling pounds forward
    3. Borrowing pounds
    4. Both B and C would hedge the risk
    5. Both A and C would hedge the risk

15. A U.S. bank made converted $1 million to Swiss francs to make a Swiss franc loan to a valued corporate customer when the exchange rate was 1.5 francs per dollar. The borrower agreed to repay the principle plus 5% interest in 1 year. The borrower repaid Swiss francs at loan maturity and when the loan was repaid the exchange rate was 1.4 francs per dollar. What was the bank's rate of return?

A) 6.00%

B) -11.67%

C) 7.14%

D) -2.00%

E) 12.50%

16. A Japanese investor can earn a 1% annual interest rate in Japan or about 4% per year in the U.S. If the spot exchange rate is 115 yen to the dollar at what one year forward rate would an investor be indifferent between the U.S. and Japanese investments?

A) ¥110.58

B) ¥116.15

C) ¥111.68

D) ¥118.42

E) ¥112.45

17. An investor starts with $1 million and converts them to 0.65 million pounds which are then invested for one year. In a year the investor has 0.6695 million pounds which she then converts to dollars at an exchange rate of 0.63 pounds per dollar. The U.S. dollar annual rate of return earned was                                                                                                                                                                                            .

A) 3.00%

B) 6.27%

C) 4.45%

D) 5.69%

E) 4.38%

18. Banks net foreign exposure is equal to
    1. Net foreign assets
    2. Net FX bought
    3. Net foreign assets + Net FX bought
    4. Assets – liabilities
    5. None of the above

19. If a firm has more foreign currency assets than liabilities, and no other foreign currency transactions, it has
    1. Positive net exposure
    2. Negative net exposure
    3. Fully balanced position
    4. Zero net exposure

20. The levels of foreign currency assets and liabilities have                        in recent years and the level of foreign currency trading has                                                                           .
    1. Increased; increased
    2. Decreased; decreased
    3. Increased; decreased
    4. Decreased; increased
    5. Decreased; stayed the same

21. The dominant supplier of foreign exchange to retail customers in the U.S. is
    1. Bank America
    2. Citigroup
    3. Chase
    4. Wells Fargo
    5. Deutschebank

22. If parity holds and the annual German nominal interest rate is 5% and the U.S. annual nominal rate is 3% and real interest rates are 2% in both countries, then inflation in Germany is about                                                                                                                                                                                than in the U.S.
    1. 1% higher
    2. 2% higher
    3. 1% lower
    4. 4% lower
    5. 2% lower

23. At the beginning of the year the exchange rate between the Brazilian Real and the U.S. dollar is 2.5 Reals per dollar. Over the year Brazilian inflation is 16% and U.S. inflation is 2%. If parity holds, at year end the exchange rate should be dollars per real.

A) 2.9070

B) 0.3509

C) 2.8498

D) 0.3749

E) 0.3440

24. The sum of the capital account plus the current account is equal to
    1. The trade deficit
    2. The current account balance
    3. Zero
    4. GDP – PDI
    5. Net foreign investment

25. The U.S. currently has a merchandise trade                    , a service trade                , and a capital account                                                                                           .
    1. Surplus, deficit, deficit
    2. Deficit, surplus, surplus
    3. Deficit, surplus, deficit
    4. Deficit, deficit, surplus
    5. Surplus, surplus, deficit

26. Government budget deficits and merchandise trade deficits generally require either a very large service account surplus or require
    1. A large amount of U.S. foreign aid
    2. A decline in U.S. interest rates
    3. A capital account deficit
    4. Americans to net borrow from foreigners

27. A capital account surplus implies that
    1. The U.S. net borrowed money from overseas and/or net sold U.S. assets to foreigners
    2. U.S. investors purchased more foreign capital assets than foreigners purchased U.S. capital assets
    3. More goods were exported than imported
    4. The U.S. net repaid its foreign debts
    5. U.S. foreign aid exceeded net unilateral transfers

28. A current account deficit implies that
    1. More goods and services are exported than are imported
    2. The country borrowed from abroad more than it loaned, and/or sold off some of its assets
    3. There is excessive consumption of foreign financial assets
    4. The value of the dollar will rise
    5. The country is going bankrupt  

29. Which of the following are likely to lead to an appreciation of the U.S. dollar (ceteris paribus)?

1. Higher real U.S. interest rates
2. Lower U.S. inflation
3. Higher U.S. productivity
4. Higher nominal U.S. interest rates

1. I, II, III and IV
2. I, II and III only
3. I, III and IV only
4. II, III and IV only
5. II and III only

30. You can buy or sell the £ spot at $1.60 to the pound. You can buy or sell the pound 1 year forward at

$1.62 to the pound. If U.S. annual interest rates are 4%, what must be the one year British interest rate if interest rate parity holds?

A) 4.00%

B) 5.25%

C) 2.75%

D) 3.33%

E) 5.65%