Chapter-3

2. Motives for Providing Credit in Foreign Markets Explain why some financial institutions prefer to provide
credit in financial markets outside their own country

4. Exchange Rate Effects on Borrowing Explain how the appreciation of the Japanese yen against the U.S.
dollar would affect the return to a U.S. firm that borrowed Japanese yen and used the proceeds for a U.S.
project

6. Bid/Ask Spread Utah Bank’s bid price for Canadian dollars is $.7938 and its ask price is $.81. What is the
bid/ask percentage spread?

7. Bid/Ask Spread Compute the bid/ask percent age spread for Mexican peso retail transactions in which
the ask rate is $.11 and the bid rate is $.10.

11. Cross Exchange Rate Assume Poland’s currency (the zloty) is worth $.17 and the Japanese yen is worth
$.008. What is the cross rate of the zloty with respect to yen? That is, how many yen equal a zloty?
14. International Markets What is the function of the international money markets? Briefly describe the
reasons for the development and growth of the European money market. Explain how the international
money, credit, and bond markets differ from one another.

19. Foreign Stock Markets Explain why firms may issue stock in foreign markets. Why might U.S. firms issue
more stock in Europe since the conversion to the euro in 1999?

23. Interest Rates Why do interest rates vary among countries? Why are interest rates normally similar for
those European countries that use the euro as their currency? Offer a reason why the government interest
rate of one country could be slightly higher than the government interest rate of another country, even
though the euro is the currency used in both countries.
 Chapter – 4
2. Inflation Effects on Exchange Rates Assume that the U.S. inflation rate becomes high relative to Canadian
inflation. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b)
supply of Canadian dollars for sale, and(c) equilibrium value of the Canadian dollar?

3. Interest Rate Effects on Exchange Rates Assume U.S. interest rates fall relative to British 116 Part 1: The
International Financial Environment interest rates. Other things being equal, how should this affect the (a)
U.S. demand for British pounds, (b) supply of pounds for sale, and (c) equilibrium value of the pound?
5. Trade Restriction Effects on Exchange Rates Assume that the Japanese government relaxes its controls
on imports by Japanese companies. Other things being equal, how should this affect the (a) U.S. demand
for Japanese yen, (b) supply of yen for sale, and (c) equilibrium value of the yen?

8. Factors Affecting Exchange Rates What factors affect the future movements in the value of the euro
against the dollar?

14. Factors Affecting Exchange Rates If Asian countries experience a decline in economic growth (and
experience a decline in inflation and interest rates as a result), how will their currency values (relative to
the U.S. dollar) be affected?
 Chapter – 7

2. Locational Arbitrage Assume the following in formation:

Given this information, is locational arbitrage possible? If so, explain the steps involved in locational
arbitrage, and compute the profit from this arbitrage if you had $1 million to use. What market forces
would occur to eliminate any further possibilities of locational arbitrage?
3. Triangular Arbitrage Explain the concept of triangular arbitrage and the scenario necessary for it to be
plausible.
4. Triangular Arbitrage Assume the following information:

Given this information, is triangular arbitrage possible? If so, explain the steps that would reflect triangular
arbitrage, and compute the profit from this strategy if you had $1 million to use. What market forces would
occur to eliminate any further possibilities of triangular arbitrage?

5. Covered Interest Arbitrage Explain the concept of covered interest arbitrage and the scenario necessary
for it to be plausible.
6. Covered Interest Arbitrage Assume the following information:

Given this information, what would be the yield (percentage return) to a U.S. investor who used covered
interest arbitrage? (Assume the investor invests $1 million.) What market forces would occur to eliminate
any further possibilities of covered interest arbitrage?
7. Covered Interest Arbitrage Assume the following information:

Given this information, is covered interest arbitrage worthwhile for Mexican investors who have pesos to
invest? Explain your answer.
9. Interest Rate Parity Explain the concept of interest rate parity. Provide the rationale for its possible
existence.

10. Inflation Effects on the Forward Rate Why do you think currencies of countries with high inflation rates
tend to have forward discounts?

21. Deriving the Forward Rate Assume that annual interest rates in the United States are 4 percent, while
interest rates in France are 6 percent. a. According to IRP, what should the forward rate premium or
discount of the euro be? b. If the euro’s spot rate is $1.10, what should the 1-year forward rate of the euro
be?
22. Covered Interest Arbitrage in Both Directions The following information is available:
■ You have $500,000 to invest.
■ The current spot rate of the Moroccan dirham is $.110.
■ The 60-day forward rate of the Moroccan dirham is $.108.
■ The 60-day interest rate in the United States is 1 percent.
■ The 60-day interest rate in Morocco is 2 percent.
a. What is the yield to a U.S. investor who conducts covered interest arbitrage? Did covered interest
arbitrage work for the investor in this case? b. Would covered interest arbitrage be possible for a Moroccan
investor in this case?

Chapter – 8
1. PPP Explain the theory of purchasing power parity (PPP). Based on this theory, what is a general forecast
of the values of currencies in countries with high inflation?
2. Rationale of PPP Explain the rationale of the PPP theory.

3. Testing PPP Explain how you could determine whether PPP exists. Describe a limitation in testing
whether PPP holds.

4. Testing PPP Inflation differentials between the United States and other industrialized countries have
typically been a few percentage points in any given year. Yet, in many years annual exchange rates between
the corresponding currencies have changed by 10 percent or more. What does this information suggest
about PPP?

5. Limitations of PPP Explain why PPP does not hold.

8. Comparing Parity Theories Compare and contrast interest rate parity (discussed in the previous chapter),
purchasing power parity (PPP), and the international Fisher effect (IFE).
9. Real Interest Rate One assumption made in developing the IFE is that all investors in all countries have
the same real interest rate. What does this mean?
19. Forecasting the Future Spot Rate Based on IFE Assume that the spot exchange rate of the Singapore
dollar is $.70. The 1-year interest rate is 11 percent in the United States and 7 percent in Singapore. What
will the spot rate be in 1 year according to the IFE? What is the force that causes the spot rate to change
according to the IFE?