Chapter 9

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

TRUE

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.

TRUE

In 1971, the Bretton Woods Agreement established that, for the first time, currency values would
be fixed against one another within narrow bands.

FALSE

In 1973, the Smithsonian Agreement II eliminated fixed exchange rates for the major economies.

TRUE

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

TRUE

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.

FALSE

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

FALSE

If the United States has inflation of 3 percent and Europe has inflation of 5 percent, the value of
the euro should increase, ceteris paribus.

FALSE

A U.S. bank has made £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.

FALSE

A country with lower interest rates than another country is likely to see its currency appreciate if
parity holds.

TRUE

During much of the 1800s, developed nations employed what came to be known as the Bretton
Woods international monetary system to manage exchange rates.

FALSE

New York is the global center of foreign exchange trading with the largest daily volume of
currency trading.

FALSE

A drop-in value of the dollar hurts U.S. importers and helps U.S. exporters, ceteris paribus.

TRUE

The dollar's value increased when the Fed cut interest rates in late 2007.

FALSE

The ongoing accumulation of foreign currency reserves by foreign monetary authorities

FALSE

Foreign exchange trading in 2016 averaged about ________ per day.

In 2015, the U.S. imported goods and services worth about ________ and exported about
________ leading to a current account ________.
A) $3.7 trillion; $3.3 trillion; deficit
B) $3.2 trillion; $3.4 trillion; surplus
C) $3.4 trillion; $3.2 trillion; surplus
D) $3.2 trillion; $3.4 trillion; deficit
E) $3.0 trillion; $3.0 trillion; balance
A U.S. investor has borrowed pounds, converted them to dollars, and invested the dollars in the
United States to take advantage of interest rate differentials. To cover the currency risk, the
investor should

A) sell pounds forward.

A U.S. bank borrowed dollars, converted them to euros, and invested in euro-denominated CDs
to take advantage of interest rate differentials. To cover the currency risk the investor should
A) sell dollars forward.
B) sell euros forward.
C) buy euros forward.
D) sell euros spot.
E) None of these choices are correct.

A U.S. firm has £50 million in assets in Britain that they need to repatriate in six months. They
could hedge the exchange rate risk by

A) buying pounds forward.

A U.S. firm has borrowed £50 million from a British firm. The borrower will need to convert
dollars to pounds to repay the loan when it is due. The U.S. firm could hedge the exchange rate
risk by
A) buying pounds forward.
B) selling pounds forward.
C) borrowing pounds.
D) both selling pounds forward and borrowing pounds.
E) both buying pounds forward and borrowing pounds.

A U.S. bank converted $1 million to Swiss francs to make a Swiss franc loan to a valued
corporate customer when the exchange rate was 1.2 francs per dollar. The borrower agreed to
repay the principal plus 5 percent interest in one year. The borrower repaid Swiss francs at loan
maturity and when the loan was repaid the exchange rate was 1.3 francs per dollar. What was the
bank's dollar rate of return?

A) 26.00 percent
B) −2.69 percent
C) 7.14 percent
D) −3.08 percent
E) 5.00 percent

Explanation: {[($1 million × SFr 1.2 × 1.05)/SFr 1.3/$]/$1 million} − 1

A Swiss bank converted 1 million Swiss francs to euros to make a euro loan to a customer when
the exchange rate was 1.85 francs per euro. The borrower agreed to repay the principal plus 3.75
percent interest in one year. The borrower repaid euros at loan maturity and when the loan was
repaid the exchange rate was 1.98 francs per euro. What was the bank's franc rate of return?
A) 7.75 percent
B) 11.04 percent
C) 9.94 percent
D) −2.82 percent
E) 5.71 percent

Explanation: {[((SFr1 million × €/SFr 1.85) × 1.0375) × SFr 1.98/€]/SFr1 million} − 1

A Japanese investor can earn a 1 percent annual interest rate in Japan or about 3.5 percent per
year in the United States. If the spot exchange rate is 101 yen to the dollar, at what one-year
forward rate would an investor be indifferent between the U.S. and Japanese investments?

A) ¥100.58
B) ¥98.56
C) ¥101.68
D) ¥97.42
E) ¥103.50

Explanation: (1 + .035) = (1 /101) (1 + .01) (X)

X = ¥103.5

A European investor can earn a 4.75 percent annual interest rate in Europe or 2.75 percent per
year in the United States. If the spot exchange rate is $1.58 per euro, at what one-year forward
rate would an investor be indifferent between the U.S. and Japanese investments?
A) $1.5484
B) $1.6108
C) $1.5335
D) $1.5498
E) $1.5977
Explanation: (1.0275/1.0475) × $1.58 = $1.5498

An investor starts with $1 million and converts it to 0.75 million pounds, which is then invested
for one year. In a year the investor has 0.7795 million pounds, which she then converts to dollars
at an exchange rate of 0.72 pounds per dollar. The U.S. dollar annual rate of return earned was
________.

A) 4.97 percent
B) 5.27 percent
C) 6.45 percent
D) 7.69 percent
E) 8.26 percent

Explanation: [(0.7795 million pounds/0.72)/$1 million] − 1 = 8.26%

An investor starts with €1 million and converts it to £694,500, which is then invested for one
year. In a year the investor has £736,170, which she then converts back to euros at an exchange
rate of 0.68 pounds per euro. The annual euro rate of return earned was ________.
A) 7.55 percent
B) 6.00 percent
C) 7.45 percent
D) 8.13 percent
E) 8.26 percent

Explanation: [(£736,170/0.68)/€1 million] − 1 = 8.26%

Banks' net foreign exposure is equal to

A) net foreign assets.

If a firm has more foreign currency assets than liabilities, and no other foreign currency
transactions, it has
A) positive net exposure.
B) negative net exposure.
C) a fully balanced position.
D) zero net exposure.
The levels of foreign currency assets and liabilities at banks have ________ in recent years, and
the level of foreign currency trading has ________.

A) increased; increased
B) decreased; decreased
C) increased; decreased
D) decreased; increased
E) decreased; stayed the same