Top 250+ Solved International Financial Management MCQ Questions Answer
Q. If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:
a. U.S. investors could possibly benefit from covered interest arbitrage.
b. British investors could possibly benefit from covered interest arbitrage.
c. neither U.S. nor British investors could benefit from covered interest arbitrage.
d. A and B
Q. Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the UK interest rate, the:
a. larger will be the forward discount of the foreign currency.
b. larger will be the forward premium of the foreign currency.
c. smaller will be the forward premium of the foreign currency.
d. smaller will be the forward discount of the foreign currency.
Q. Assume the bid rate of a Singapore dollar is £0.20 while the ask rate is £0.21 at Bank X. Assume the bid rate of a Singapore dollar is £0.22 while the ask rate is £0.23 at Bank Z. Given this information, what would be your gain if you use £1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the £1,000,000 you started with?
a. £11,764.
b. £47,619.
c. £36,585.
d. £48,710.
Q. Assume the bid rate of a Swiss franc is £0.42 while the ask rate is £0.45 at Bank X. Assume the bid rate of the Swiss franc is £0.40 while the ask rate is £0.41 at Bank Y. Given this information, what would be your gain if you use £1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the £1,000,000 you started with?
a. £24,340
b. £125,000
c. £150,000
d. £12,550
Q. Arbitrageurs in foreign exchange markets:
a. take advantage of the small inconsistencies that develop between markets.
b. attempt to make profits by outguessing the market.
c. make their profits through the spread between bid and offer rates of exchange.
d. need foreign exchange in order to buy foreign goods.
Q. Covered interest rate parity occurs as the result of:
a. the actions of market-makers.
b. purchasing power parity
c. interest rate arbitrage.
d. stabilising speculation.
Q. Given the following interest rates on different currencies, which of the following is true? Sterling 6 percent. Euro 3.5 percent. Dollar 6.25 percent. Yen 0.5 percent.
a. The dollar must be at a forward premium to the yen because a very high percentage of world trade is carried out in dollars.
b. The yen must be at a forward premium to the euro because one can borrow yen much more cheaply than euro.
c. The euro must be at a forward premium to sterling because no one believes that the euro can continue to fall in value.
d. The dollar must be at a forward premium to the yen because no one would be willing to hold yen at such a low rate of interest.
Q. Which of the following best explains the fact that interest rates on the euro are lower than those on the pound? Inflationary expectations are higher in the UK than in the eurozone.
a. British markets are offshore from mainland Europe.
b. Unemployment is higher in the eurozone than in the UK.
c. Bond prices are lower in the UK than in the eurozone.
d. The euro is a weaker currency than sterling.
Q. The euro is:
a. a currency, the value of which is determined by demand and supply.
b. the currency of EU member countries.
c. a weighted average of the currencies of EU member countries.
d. a currency that is only traded offshore.
Q. Overshooting models of the exchange rate are an attempt to explain:
a. why purchasing power parity plays no role in determining the value of a currency.
b. why exchange rates are so volatile.
c. why the foreign exchange market is never in equilibrium.
d. why forward rates of exchange are not good predictors of future spot rates of exchange.
Q. Suppose a deposit in New York earns 6 percent a year and a deposit in London earns 4 percent a year. Interest rate parity holds if the
a. U.S. dollar depreciates by 2 percent a year.
b. U.S. dollar appreciates by 2 percent a year.
c. U.K. pound depreciates by 2 percent a year.
d. None of the above answers is correct because interest rate parity requires that the interest
Q. The biggest disadvantage of a fixed exchange rate is the
a. increased probability of high inflation.
b. tradeoff between supporting the exchange rate and adjusting the trade balance.
c. tradeoff between supporting the exchange rate and maintaining full employment.
d. increased probability of a trade deficit.
Q. The effect of a depreciation of the domestic currency on the trade balance is likely to
a. increase it in the short and long runs.
b. decrease it in the short run and increase it in the long run.
c. decrease it in the short and long runs.
d. increase it in the short run and decrease it in the long run.