Which financial market is the largest in terms of turnover?
FX market
100
Are currencies flexible under the gold standard?
No
100
What is the "carry trade"?
borrow low yielding currency and invest in high yielding currency
100
International Big Mac prices are a better indicator for exchange rate changes than international gold prices (in different currencies).
False
100
Give one example of a firm's transaction exposure.
importer must pay 1m euros every 3 months
200
What is the name of the common currency in many European countries?
euro
200
If 30 AUD were pegged to 1 ounce of gold and 10 GBP were pegged to 1 ounce of gold, what would the AUD per GBP1 exchange rate be?
AUD3 = GBP1
200
What is the term/ word for capitalizing on a discrepancy in quoted prices by making a profit?
speculation
200
What is the Fisher effect?
links nominal interest rates, real interest rates and inflation rates
200
What is translation exposure?
exposure of an MNCs consolidated financial statements to exchange rate fluctuations
300
What is the reciprocal exchange rate of AUD1.25 = USD1?
USD 1/1.25 = AUD1
USD 0.8 = AUD1
300
Which mechanism corrects exchange rate misalignments under a gold standard?
Price-specie-flow mechanism
300
Spot rate AUD1.05 = USD1;
Expected spot rate AUD1.05 = USD1 in one year;
Interest rate in AUD is 4% p.a.;
Interest rate in USD is 2% p.a.;
What is the riskless profit opportunity in %?
no riskless profit possible
300
Which effects (parity conditions) must hold so that PPP = IRP?
Fisher effect and expectations theory of forward exchange rates
300
What is economic exposure? Does it include transaction exposure?
sensitivity of a firm's cash flows to exchange rate movements; yes
400
Name 3 factors that affect the bid-ask spread of an exchange rate?
competition, volume, currency risk
400
What is the equilibrium interest rate in Hong Kong under a currency board regime of the Hong Kong dollar pegged to the US dollar?
equal to the US interest rate
400
Spot rate AUD1.00 = USD1;
360-day forward rate AUD1.10 = USD1;
Interest rate in AUD is 4% p.a.;
Interest rate in USD is 4% p.a.;
What is the riskless profit opportunity in %?
10%
400
Do high-yielding currencies often trade at a forward premium or discount?
Premium
400
What type of exposure can be hedged with money market instruments?
transaction exposure
500
By how much does the AUD change if the exchange rate moves from AUD1.00 = USD1 to AUD1.25 = USD?
4/5/1-1 = -0.2
500
Under which conditions can speculators "attack" a currency?
fixed currency and overvalued
500
Spot rate AUD1.05 = USD1;
90-day forward rate AUD1.05 = USD1;
Interest rate in AUD is 4% p.a.;
Interest rate in USD is 2% p.a.;
What is the riskless profit opportunity in %?
0.5%
500
What are the reasons for positive autocorrelation of a currency's (exchange rate) returns?
slow dissemination of information, momentum, bandwagon effects
500
In 2013, Tesla share prices (in US dollar) rose 100% and the US dollar fell by 50% relative to the Australian dollar. What was the Australian dollar return for an (Australian) investor?