1.

The financial account includes all international economic transactions with income or payment flows
occurring within the year.
2. A country experiencing a serious BOP deficit is more likely to contract imports than otherwise.
3. Balance of payment (BOP) data may be important for any of the following reasons:
Bop date helps to forecast a countrys market potential, especially in the snort run.
The bop is an important indicator of a countrys foreign exchange rate
Changes is a countrys bop may signal a change in controls over payment of dividends and interest.
4. Over the last several years, the united states has run a deficit in the good trade balance and a surplus
in the services trade balance.
5. If most major economies are operating under a regime of fixed exchange rates, then a surplus in a
countrys of payments suggests that the country should revalue its currency.
6. When the spot and forward exchange markets are not in equilibrium as described by interest rate
parity, the potential for riskless arbitrage profit exists. This is called covered interest arbitrage CIA
7. An international currency exchange rate arbitrage rule of thumb is :
If the difference in interest rate is greater than the forward premium, invest in the higher interest
yielding currency
8. Howard borrows ¥5.000.000 for 6 months at an annual rate of 0.06% and uses the proceeds to invest
in the u.s. money market at an annual rate of 4.50% if the spot rate today is ¥115/$ and the spot rate in
6 months is ¥113/$ howards net proceeds will be: ¥8.587
9. One year ago the spot rate of u.d dollar for Canadian dollars was $1/c$1. Since that time the rate of ..
in the u.s. has been 4% greater than thatin Canada. Based on the theory of relative PPP the current
spot exchange rate of U.S dollars for should be approximately: $1.04/c$1
10. If according to the law of one price the current exchange rate of dollars per britih pound is $ 1.43/ £
then at an exchange rate of $1.28/£ the dollar is: overvalued
11. The choice between domestic-currency and foreign-currency investment or borrowing should be
based on spot and forward exchange-rate quotations which reflect transaction costs: T
12. Centralized cash management reduce the precautionary cash needs via pooling, funds can be moved
from central location to where they are needed: T
13. The evidence shows considerable independence between different countries returns, suggesting large
gains from international identification. Portfolios that are internationally diversified do indeed prove to
have lower volatility than portfolio of domestic stocks of the same size: T
14. The net- present-value technique is difficult to use in the case of foreign investment projects. The
adjusted-present-value technique is recommended instead: T
15. Discount rate can be higher on foreign investment project than domestic project because country risk
and currency risk. These risk can be diversified by shareholders if they invest in a number of
countries/currencies, and this reduces required risk premiums: T
16. What is translation risk? Is when the value USD dollar of asset or liabilities to change with respect in the
change exchange rate in the moment of translate amount of money to other currency
17. What is foreign exchange exposure? Is a sensitivity in the change the real domestic-currency to change
in the exchange rate
18. What are the factors affecting the impact of exchange rates on profits? Devaluations- change exchange
rate.
19. The economy publishes annually “the hamburger standard” by which they compare the prices of the
McDonalds corporation Big Mac hamburger around the world. The index estimates the exchange rates
for currencies based on the assumption that the burgers in questions are the same across the word and
therefore, the price should be the same. If a Big Mac cost $2.54 in the United States and 259 yen in
Japan, what is the estimated exchange rate of yen per dollar as hypothesized by the hamburger index ?
R:115,75yen/$
20. If the current exchange is 124 Japanese yen per us dollar the price of a Big Mac hamburger in the
united states is $2,54 and the price of a Big Mac hamburger in Japan is 294 yen the other things equal
the Big Mac hamburger in Japan is: under priced
21. Others things equals, and assuming efficient markets. If a Honda accord cost $18.365 in the U.S then at
an exchange rate of $1.43/libra, the Honda accord should cost_________ in great Britain.R:12,843libra
22. Which of the following necessary for the calculation of the forward rate? R:All of above
23. Assume a nominal interest rate on one-year U.S Treasury Bills of 4,60 and a real rate of interest of
2.50% Using the fisher effect equation, what is the approximate expected rate of inflation in the U.S
over the next year?: 2,10%
24. The relationship between the percentage change in spot exchange rate over time and the different
between comparable interest rates in different national capital markets is known as: the international
fisher effect
25. According to the international fisher effect, if an investor purchases a five-year U.S bond that has an
annual interest rate 5% rather than comparable British bond that has a an annual interest rate of 6%,
then the investor must be expected the U.S dollar to appreciate at a rate of at least 1% per year over
the next 5 years.
26. A forward rate is an exchange rate quote today for settlement at some time in the future.
27. The current U.S dollar-yen spot rate is 125yen/$. If the 90-day forward exchange is 127yen/$then the
yen is selling at a per annum __________of________________. R:disconunt; 6,30%
28. Which covered interest arbitrage? R: All of above
29. P/E RATIO: price to earings, is a valuation of current stock price of the company relative to its earnings
per share. Formula: market value per share/earnings per share(EPS) a high P/E suggest that investor
are excepting higher earnings growth in the future compared to companies with a lower P/E.
30. Bull market: is when everything in the economy is great. The market characterized by using price, over
a relatively large period of time.
31. The bears: is when economy is bad, if growth bear the market is a general decline in the stock market
over a period of time; investors anticipate further losses are motivated to sell.
32. IPO: initial public offering, is when a company issues common stock or share to the public for the first
time, - issued by smaller and younger companies looking capital to expand, but can also be done by
bigger, privately companies looking to become publicly traded.
33. 52 week hi and low: the highest and lowest price and which a stock has trade in the past two month
or 52 weeks.
34. Bretton Woods agreement: agreement (1994) made in Bretton woods which helped to establish a
fixed exchange rate in terms of gold for major currencies. – this agreement governed currency until the
early 1970, when a floating exchange rate system was adopted.
35. Triangular arbitrage: the process of converting one currency to another. Converting it again to a third
currency and finally converting it back to the original currency within a short time.
36. Spread: the different between the BID and the ASK, price of a security or assets.
37. Outright forward exchange: is when you do a contract in which cotises a amount of money for a future
buy or sell it amount.
38. The forward foreign exchange: is the rate that is contracted today for the exchange of currencies at a
specified date in the future.
39. Forward premium: ∆ forward premium on a foreign currency means that the forward value of the
foreign currency exceeds the currency´s spot value.
40. Forward discount: means the forward value is less than the spot value.
41. CIA (covered interest arbitrage): when the spot and forward exchange markets are not in equilibrium
as described by interest rate parity the potential for “riskless” arbitrage profit exists.
42. Short selling: involves an investor borrowing share and then selling then in the hope that is price will
fall in the futures, when the investor then buys back the share, they owe, or are “short of” for allowed
price than they first should then than before returning them to the lend.
43. Head and shoulders pattern: a technical analysis term used to described a chary formulation in which a
stock price.
44. Law of price: one good has the same price in every country multiplied by the exchange rate; the price
of one good must be equal to the price to other country multiplied by the exchange rate.
45. Margin call: Is when your portfolio losses enough money margin requirement and if you don’t have
the extra money you will end up being forced to sell your stocks.
46. Average directional index: the evaluate the strength of a current trend by it up or down is important to
determine whether the market is trending or trading.
47. Current account: is the account in the balance of payment where are registered all the income and
output of goods and services they include all the imports and exports.
48. Interest rate parity: establish the lines between currency markets simultaneous spot and forward
market with domestic and overseas value.
49. The fisher effect: for only economy, nominal interest rate equal the real interest rate plus the expected
inflation rate.
50. PPP: price of the basket of good of one country A must be equal price of the basket of good of country
B multiplied by exchange rate.
 51. Interest parity: domestic interest rate minus foreign interest rate is equal to the exchange percent
expectation in the exchange rate.

True or false

a. interbank quotations are given as bid and offer. Offer is the price at which the bank is willing to buy one unit
of the base currency. False

b. Direct quotation refers to the number of units of a local currency per unit of a foreing currency. False

c. under the gold standard of currency exchange that existed from 1879 to 1914 an ounce of gold cost $20.67
in U.S dollars and E 4.2474 in british pounds . therefore the exchange rate of pounds per dollar under this fixed
exchange regime was E 0.2832/$. false

d. world war 1 caused the suspension of the gold standard for fixed international exchange rates because the
war cost too much money. False

e. in January 2002 the argentine peso changed in value from peso 1.00/$ to peso 1.40/$ thus the argentine
peso weakened against the U.S dollar. True

Fill in the blanks

a. an is a type of opinion that can be exersice only on the expiration date itself.

b. the equation for estimating the net profit of a butterfly spread is:

c. arbitrage is a trading strategy that takes advantage of two or more securities being mispriced relative to
each other.

d. margin call is a request for extra margin when the balance in the margin account falls below the
maintenance margin level

e. strangle is a strategy in which you have a long position in a call and a put with different strike price.

Write the correct answer

a. under the gold standard of currency exchange that existed from 1879 to 1914 an ounce of gold cost $20.67
in U.S dollars and E 4.2474 in british pounds. Therefore, the exchange rate of pounds per dollar under this fixed
exchange regime was 0,54

b. most foreing exchange transactions are through the us dollar. If the transaction is expressed as the foreign
currency per dollar this is know as whereas are expressed as dollars per foreing unit