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Multiple Choice Questions in International Finance

1. If the current exchange rate is 113 Japanese yen per U.S. dollar, the price of a Big Mac hamburger in the United States is $3.41, and the price of a Big Mac hamburger in Japan is 280 yen, then other things equal, the Big Mac hamburger in Japan is ________.

A. correctly priced
B. under priced
C. over priced
D. not enough information to determine if the price is appropriate or not

2. According to the Big Mac Index, the implied PPP exchange rate is Mexican peso 8.50/$1 but the actual exchange rate is peso10.80/$1. Thus, at current exchange rates the peso appears to be ________ by ________.

A. overvalued;approximately 21%
B. overvalued;approximately 27%
C. undervalued; approximately 21%
D. undervalued; approximately 27%

3. The government just released international exchange rate statistics and reported that the real effective exchange rate index for the U.S. dollar vs the Japanese yen decreased from 105 last year to 95 currently and is expected to fall still further in the coming year. Other things equal U.S. ________ to/from Japan think this is good news and U.S. ________ to/from Japan think this is bad news.

A. importers; exporters
B. importers; importers
C. exporters; exporters
D. exporters; importers

4. Short-term foreign exchange forecasts are often motivated by such activities as ________ whereas long-term forecasts are more likely motivated by ________.

A. long-term investment; long-term capital appreciation
B. long-term capital appreciation; desire to hedge a receivable
C. the desire to hedge a payable; the desire for long-term investment
D. the desire for long-term investment; the desire to hedge a payable

5. Jack Hemmings bought a 3-month British pound futures contract for $1.4400/£ only to see the dollar appreciate to a value of $1.4250 at which time he sold the pound futures. If each pound futures contract is for an amount of £62,500, how much money did Jack gain or lose from his speculation with pound futures?

A. $937.50 loss
B. $937.50 gain
C. £937.50 loss
D. £937.50 gain

6. A foreign currency ________ gives the purchaser the right, not the obligation, to buy a given amount of foreign exchange at a fixed price per unit for a specified period.

A. future
B. forward
C. option
D. swap

7. Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit is called a

A. collateralized deposit.
B. marked market sum.
C. margin.
D. settlement.

8. Peter Simpson thinks that the U.K. pound will cost $1.43/£ in six months. A 6-month currency futures contract is available today at a rate of $1.44/£. If Peter was to speculate in the currency futures market, and his expectations are correct, which of the following strategies would earn him a profit?

A. Sell a pound currency futures contract.
B. Buy a pound currency futures contract.
C. Sell pounds today.
D. Sell pounds in six months.

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Can anyone help me with these review questions? Any assistance would be greatly appreciated. The book I'm using is Fundamentals of Multinational Finance Edition III.

Solution Preview

Please see attached file:
1. If the current exchange rate is 113 Japanese yen per U.S. dollar, the price of a Big Mac hamburger in the United States is $3.41, and the price of a Big Mac hamburger in Japan is 280 yen, then other things equal, the Big Mac hamburger in Japan is ________.  

A. correctly priced  
B. under priced  
C. over priced  
D. not enough information to determine if the price is appropriate or not  

Answer: B. under priced  

Price in Yen according to purchasing power parity= Yen 113 / $ x $ 3.41= 385 yen
Since the Big Mac hamburger is priced at 280 yen, it is underpriced

2.  According to the Big Mac Index, the implied PPP exchange rate is Mexican peso 8.50/$1 but the actual exchange rate is peso10.80/$1. Thus, at current exchange rates the peso appears to be ________ by ________.

A. overvalued;approximately 21%  
B. overvalued;approximately 27%  
C. undervalued; approximately 21%  
D. undervalued; approximately 27%  

8.50 pesos should buy 1 dollar but actually it requires 10.80 pesos are required to buy 1 dollar; therefore the peso is undervalued
An undervalued currency is a currency worth less than PPP exchange rate

undervaluation= -21% =(8.5-10.8)/10.8

3.  The government just released international exchange rate statistics and reported that the real effective exchange rate index for the U.S. dollar vs the ...

Solution Summary

Answers Multiple Choice Questions in International Finance.

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