International Finance excercise

1 International Finance Exercise

一 Multiple Choice (5 questions, 10points)

1. Gresham's Law states that

A. Bad money drives good money out of circulation.

B. Good money drives bad money out of circulation

C. If a country bases its currency on both gold and silver, at an official exchange rate, it will be the more

valuable of the two metals that circulate.

D. None of the above.

2. The Triffin paradox

A. Was first proposed by Professor Robert Triffin

B. Warned that the gold-exchange system of the Bretton Woods agreement was programmed to collapse

in the long run.

C. Was indeed responsible for the eventual collapse of the dollar-based gold-exchange system in the

early 1970s.

D. all of the above are correct

3. If Japan exports more than it imports, then

A. The supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.

B. One can infer that the yen would be likely to appreciate against other currencies

C. a) and b)

D. None of the above

4. In 2007 the United States had a current account deficit. The current account deficit implies that

the United States

A. Had a surplus on legal consulting and engineering services

B. Produced more output than it consumed

C. Consumed more output than it produced

D. None of the above

5. The "J-curve effect" shows:

A. the initial deterioration and the eventual improvement of a country's trade balance following a

currency depreciation

B. the initial improvement and the eventual depreciation of a country's trade balance following a

currency depreciation

C. the trade balance's lack of responsiveness to the exchanges rate changes

D. none of the above

二 true or false question (5 questions, 10points)

F 1. The forward expectation parity Fisher Effects suggests that an increase in the expected inflation rate in a

country will cause a proportionate increase in the interest rate in the country.

F 2. Currently, international reserve assets are comprised of gold, platinum, foreign exchanges, and special

drawing rights (SDRs).IMF

T 3. The spot market involves the almost-immediate purchase or sale of foreign exchange.

T 4. The underlying assets of the Eurodollar futures contracts are $1,000,000 90-day Eurodollar deposits.

T 5. Zero coupon bonds are sold at a discount from par value.

三 Question and Answer (2 questions, 20points)

1. Discuss the advantages and disadvantages of the gold standard.

The advantages of the gold standard include: (I) since the supply of gold is restricted, countries cannot have

high inflation; (ii) any BOP disequilibrium can be corrected automatically through cross-border flows of

gold. 2 On the other hand, the main disadvantages of the gold standard are: (I) the world economy can be subject to

deflationary pressure due to restricted supply of gold; (ii) the gold standard itself has no mechanism to

enforce the rules of the game, and, as a result, countries may pursue economic policies (like de-monetization

of gold) that are incompatible with the gold standard.

2. In order for a derivatives market to function most efficiently, two types of economic agents are

needed: hedgers and speculators. Explain.

Two types of market participants are necessary for the efficient operation of a derivatives market:

speculators and hedgers.

A speculator attempts to profit from a change in the futures price. To do this, the speculator will take a

long or short position in a futures contract depending upon his expectations of future price movement.

A hedger, on-the-other-hand, desires to avoid price variation by locking in a purchase price of the underlying

asset through a long position in a futures contract or a sales price through a short position. In effect, the

hedger passes off the risk of price variation to the speculator who is better able, or at least more willing, to

bear this risk.

四、

1. A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. The

one-year interest rate in the U.S. is i$ = 2% and in the euro zone the one-year interest rate is i€ = 6%. The

spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00. Show how to

realize a certain profit via covered interest arbitrage.

2. The Singapore dollar—U.S. dollar (S$/$) spot exchange rate is S$1.60/$, the Canadian dollar—U.S.

dollar (CD/$) spot rate is CD1.33/$ and the S$/CD1.15.

Suppose that you have 1million U.S dollars at hand,

a. to judge if there exists arbitrage opportunity?

b. determine the right route and calculate the arbitrage profit..

1) 1+i$=1.01＞ F/S*(1+i€)=1.50/1.60*(1+4%)