Tutorial 3 PDF

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Tutorial 3 - week 3...

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Tutorial 3

1. The value of the Australian dollar (A$) today is US$0.73. Yesterday, the value of the Australian dollar was US$0.69. The Australian dollar ____ by ____%. a.

depreciated; 5.80

b.

depreciated; 4.00

c.

appreciated; 5.80

d.

appreciated; 4.00

2. If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction. a.

liquid; highly sensitive

b.

illiquid; insensitive

c.

illiquid; highly sensitive

d.

none of the above.

3.

____ is not a factor that causes currency supply and demand schedules to change.

a.

Relative inflation rates

b.

Relative interest rates

c.

Relative income levels

d.

Expectations

e.

All of the above are factors that cause currency supply and demand schedules to change.

4. A large increase in the income level in Indonesia along with no growth in the Australian income level is normally expected to cause (assuming no change in interest rates, no improvement in Indonesian economics conditions or other factors) a(n) ____ in Indonesian demand for Australian goods, and the Indonesian Rupee should ____. a.

increase; appreciate

b.

increase; depreciate

c.

decrease; depreciate

d.

decrease; appreciate

5. In general, when speculating on exchange rate movements, the speculator will borrow the currency that is expected to appreciate and invest in the country whose currency is expected to depreciate. a. True b. False

6. An increase in Australian interest rates relative to German interest rates would likely ____ the Australian demand for euros and ____ the supply of euros for sale. a.

reduce; increase

b.

increase; reduce

c.

reduce; reduce

d.

increase; increase

7. In the above scenario, in equilibrium assuming no change in all else, the euro would ____. a. appreciate against the Australian dollar. b. depreciate against the Australian dollar. c. result is ambiguous. d. remain constant against the Australian dollar.

8. Baylor Bank believes the New Zealand dollar will appreciate over the next five days from A$.48 to A$.50. The following annual interest rates apply:

Currency

Lending Rate

Australian Dollars New Zealand dollar (NZ$)

7.10% 6.80%

Borrowing Rate 7.50% 7.25%

Baylor Bank has the capacity to borrow either NZ$10 million or A$5 million. If Baylor Bank's forecast is correct, what will its Australian dollar profit be from speculation over the five-day period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)? a.

A$521,325.

b.

A$500,520.

c.

A$104,262.

d.

A$413,419.

e.

A$208,044.

9. The real interest rate adjusts the nominal interest rate for: a.

exchange rate movements.

b.

income growth.

c.

inflation.

d.

government controls.

e.

none of the above

10. If inflation in New Zealand suddenly increased while Australian inflation stayed the same, there would be: a. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$. b. an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$. c. an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$. d. an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.

11. In the above scenario, NZ$ ____. a. appreciated against the Australian dollar. b. depreciated against the Australian dollar. c. result is ambiguous. d. remain constant against the Australian dollar.

12. If Australia and Japan engage in substantial financial flows but little trade, ____ directly influences their exchange rate the most. If Australian and Switzerland engage in much trade but little financial flows, ____ directly influences their exchange rate the most. a.

interest rate differentials; interest rate differentials

b.

inflation and interest rate differentials; interest rate differentials

c.

income and interest rate differentials; inflation differentials

d.

interest rate differentials; inflation and income differentials

e.

inflation and income differentials; interest rate differentials

13. Assume the following information regarding Australia and European annualized interest rates:

Currency

Lending Rate

Borrowing Rate

Australian Dollar

(A$)

6.73% 7.20%

Euro

(€)

6.80% 7.28%

Trensor Bank can borrow either A$20 million or €20 million. The current spot rate of the euro is A$1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be A$1.10 in 90 days. What is Trensor Bank's Australian dollar profit from speculating if the spot rate of the euro is indeed A$1.10 in 90 days? a.

A$579,845.

b.

A$583,800.

c.

A$588,200.

d.

A$584,245.

e.

A$980,245.

14. The markets that have a smaller amount of foreign exchange trading for speculatory purposes than for trade purposes will likely experience more volatility than those where trade flows play a larger role. a. True b. False

15. The value of euro was A$1.30 last week. During last week the euro depreciated by 5%. What is the value of euro today? a.

A$1.365

b.

A$1.235

c.

A$1.330

d.

A$1.30...