Question : MULTIPLE CHOICE 1.The spot rate for the U.S. dollar relative to : 1325782

MULTIPLE CHOICE

1.The spot rate for the U.S. dollar relative to the Euro is $1.47/€. The spot rate for the U.S. dollar relative to the Canadian dollar is $0.765/C$. What is the cross exchange rate for the C$ and €?

a.C$1.922/€

b.€1.922/C$

c.C$0.5204/€

d.€0.5204/C$

2.Which of the following may prevent purchasing power parity from holding across different countries?

a.Import taxes

b.transportation costs

c.transaction costs

d.all of the above

3.A 32-inch television sells in the United States for $157. The same television sells in Canada for C$212. What must the exchange rate be for Purchasing Power Parity to hold in this example?

a.$1.3503/C$

b.C$1.3053/$

c.$0.7406/C$

d.C$0.7406/$

4.A coffee table in Canada sells for C$134. The same coffee table sells for $92 in the United States. The expected inflation rate for the next year in Canada is 10% and the expected one year inflation rate for the United States is 8%. What must the exchange rate be currently for Purchasing Power Parity to hold now, and what must the exchange rate change to in order for Purchasing Power Parity to hold in one year.

a.$0.6866/C$ and $0.6741/C$

b.C$0.6866/$ and C$0.6741/$

c.$1.4565/C$ and $1.484/C$

d.none of the above

5.Purchasing Power Parity implies that if the law of one price holds at all times then

a.differences in interest rates are associated with expected changes in exchange rates

b.differences in expected inflation rates between two countries are associated with expected changes in exchange rates.

c.Foreign exchange rates are fixed.

d.neither a or b is correct

6.Suppose that the one-year risk-free interest rate is 5% in the United States. The current spot rate is $0.7642/C$ and the one-year forward rate is $0.7834/C$. What must the Canadian one-year risk-free interest rate be in order for interest rate parity to hold?

a.0.929%

b.0.783%

c.2.43%

d.7.64%

7.The annualized rate of interest on three-month government bonds is 7% in Italy and the annualized rate on three-month government bonds is 4% in the United States. The current spot rate is $1.12/€. Using interest rate parity what is the implied three-month forward rate between the U.S. dollar and the Euro.

a.$1.112/€

b.$1.128/€

c.€0.8865/$

d.$1.0886/€

8.The inflation rate in London is expected to be 10% over the next year and the inflation rate in Canada is expected to 6%. Using Purchasing Power Parity you could say that

a.the £ will appreciate relative to the Canadian dollar

b.the Canadian dollar will appreciate relative to the £

c.the risk-free rate of interest in London will rise to compensate for the higher inflation rate.

d.the risk-free rate of interest in London will fall to compensate for the higher inflation rate.

9.In the United States the expected rate of inflation is 4% and in Canada the expected rate of inflation is 8%. The risk-free rate of interest in the U.S. is 3%. What would the risk-free interest rate have to be in Canada for real interest rate parity to hold?

a.9.05%

b.3.0%

c.4.0%

d.6.96%

10.The expected rate of inflation in Japan is 12% and the expected rate of inflation in Italy is 9%. In Italy the risk-free rate of interest is 6%. What does the risk-free rate of interest have to be in Japan for real interest rate parity to hold?

a.3.16%

b.8.92%

c.6.0%

d.12.0%