1. Which of the following is a characteristic of the foreign exchange market as a perfect market?

a. The volume of daily turnover is low

b. A large number of buyers and sellers operate in the market
c. There is limited access to information
d. The products are heterogenous

2. Which of the following does NOT describe the objective of the participant in foreign exchange (FX)
market?
a. An exporter who aims to reduce or eliminate FX risks
b. An importer who tries to obtain riskless short-term loans
c. A central bank tries to smooth out exchange rate fluctuations
d. An investor who tries to make profits by speculating on the open positions

3. A foreign exchange transaction consists of the following sequential process:

a. Decision making; Price discovery; Execution; Settlement; and Position keeping
b. Price discovery; Decision making; Execution; Settlement; and Position keeping
c. Decision making; Execution; Price discovery; Settlement; and Position keeping
d. Decision making; Execution; Settlement; Price discovery; and Position keeping

4. If JPY/AUD exchange rate rose from 68.50 to 69.72, then the rise is equal to:
a. 12,200 points
b. 1,220 points
c. 122 points
d. 1.22 points

5. Which of the following statements is NOT true?

a. Forward value date can be fixed on a term of either number of days, weeks or months after the
spot value date
b. Only the buyers can specify the forward value date
c. The forward value date cannot be less than 2 business days after the contract date
d. The forward value date is to be considered from the agreement date

6. Suppose that the CHF/GBP spot rate is 0.6963-0.6968, you have been quoted 63-68, 4-6, 9-14, 25-38.
Which of the following is true?
a. The spot rate quoted is applicable to round amounts of GBP 4-6 million, 9-14 million or 25-38
million
b. The last 3 numbers are the movements of spot rates at different time intervals during the day
c. The outright rates at 30-day, 60-day and 90-day are 0.6967-0.6974, 0.6972-0.6982 and
0.6988-0.7006
d. The spot rates are applicable to specific times of the day: 8am, 11am, 2pm and 5pm

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 For Questions 7-9, you are given the following exchange rates:

EUR/USD 0.9395/0.9681

AUD/USD 1.7624/1.7864

JPY/AUD 65.91/67.71

7. What is the cross OFFER/ASK rate for JPY/USD?

a. 119.3321
b. 120.9571
c. 37.9030
d. 36.8954

8. What is the cross BID rate for EUR/AUD?

a. 1.6558
b. 0.5331
c. 0.5259
d. 1.6783

9. What is the mid rate for JPY/AUD and the bid-offer spread (in points)?
a. mid-rate = 66.81 and bid-offer spread = 1.8 points
b. mid-rate = -66.81 and bid-offer spread = 0.018 points
c. mid-rate = 66.81 and bid-offer spread = 18,000 points
d. mid-rate = 180 and bid-offer spread = 66.81 points

10. Dealer A quotes 0.9395/0.9662 for the EUR/USD exchange rate to Dealer B. The price (in U.S. dollars)
at which B can buy one unit of the Euro is:
a. 0.9395
b. 0.9662
c. 1.0350
d. 1.0644

For Questions 11-13, suppose Dealer A quoted you the following spot and forward exchange rates:

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 AUD/USD

Spot 1.7624-1.7685

30-day 10-20

90-day 50-40

11. At 30-day, 1 US dollar can be bought at the rate of:

a. AUD 1.7634
b. AUD 0.5671
c. AUD 1.7705
d. AUD 0.5648

12. What is the outright bid and offer/ask rates for (AUD/USD) at 90-day?
a. 1.7674-1.7725
b. 1.7574-1.7645
c. 1.7684-1.7745
d. 1.7564-1.7625

13. If you agree to sell USD 200,000 to Dealer A in 90 days, it means you will get in exchange:
a. AUD 353,480
b. AUD 351,480
c. AUD 352,900
d. AUD 354,500

1. Which of the following is not an international economic transaction?

A: Exporting Australian beef to Japan.
B: Selling Japanese yen bonds by BHP Billiton to Australian investors.
C: Selling Telstra shares to foreign investors.
D: Importing crude oil.

2. Which of the following items is not a stock?

A: Foreign assets held by Australian investors.
B: Debt owed by the government of Victoria.
C: Exports of live sheep to Saudi Arabia.
D: Australian dollar bonds held by Japanese investors.

3. The main component of the current account is:

A: the trade balance.
B: unilateral transfers.
C: the balance of money market transactions.
D: the balance of capital market transactions.

4. The Balance of Payments is an accounting identity in which:

A: all accounts must show a surplus.

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B: a surplus on the capital account is offset by a deficit on the financial and current accounts, assuming the
balancing item equals zero.
C: a surplus on the current account is offset by a deficit on the financial and capital accounts, assuming the
balancing item equals zero.
D: all accounts must show a deficit.

5. A rise in the exchange rate (S) leads to:

A: a rise in the supply of foreign exchange.
B: a fall in the supply of foreign exchange.
C: no change in the supply of foreign exchange.
D: any one of the above.

6. You are given the following information:

Nominal effective AUD/USD exchange rate index at end of 2001 92.50

(based on 100.00 at end of 1999)

Australian CPI at end of 2001 (based on 100 at end of 1999) 105

US CPI at end of 2001 (based on 100 at end of 1999) 102

Calculate the real effective AUD/USD exchange rate index at end of 2001.
A: 95.22
B: 97.13
C: 100.00
D: 89.86

7. You are given the following information:

US dollar price of exports 2

Australian dollar price of imports 10

Quantity of exports 1500

Quantity of imports 800

AUD/USD exchange rate 1.2346

Calculate the balance on current account in Australian dollar terms.
A. –AUD 4,296
B. –AUD 5,570
C. +AUD 5,570
D. –USD 3,480

8. The quantity of imports is equal to:

40 - (2.1*domestic price of imports)
Based on the following information, calculate the demand for foreign exchange.

US dollar price of imports 2.50

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 AUD/USD exchange rate 1.2346
A. 33.52
B. 83.80
C. 35.74
D. 110.34

9. The purchase of foreign bonds by a domestic corporation leads to:

A. an increase in the demand for the domestic currency
B. an increase in the demand for the foreign currency
C. a decrease in the supply of the domestic currency
D. both an increase in the demand for the foreign currency and a decrease in the supply of the domestic currency

10. Which of the following transaction is correctly recorded as a credit entry in the Balance of Payments?
A. A government transfer of $20 million to the UN
B. Dividends paid out by Telstra by shareholders who live in Brisbane
C. Residents received interest income received from a foreign bank located in Europe
D. BHP Billiton borrowed RMB500 million from Bank of China to fund a project in Wuhan, China.

11. You are given the following information:

USD/AUD exchange rate index (31/12/12) 103.76

GBP/AUD exchange rate index (31/12/12) 98.07

US’s share of Australia’s two-way merchandise trade 74%

UK’s share of Australia’s two-way merchandise trade 26%

Calculate the geometric trade-weighted effective exchange rate as at 31/12/12.
A. 34.33
B. 102.25
C. 102.28
D. 1957.81

1. Which of the following are the factors affecting the supply of and demand for foreign exchange
according to the partial supply and demand theory?
a) The role of government
b) relative interest rates
c) relative growth rates
d) relative unemployment rates
e) relative trade balance

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 f) expectations
g) trade restrictions
h) capital control

2. Which of the following is true?

a) A higher domestic inflation rate will lead to an increase in the supply of exports hence an increase
in demand and supply for foreign exchange, resulting in an appreciation of the domestic currency.
b) A lower domestic inflation rate will lead to an increase in the supply of exports hence an increase in
demand and supply of foreign exchange, resulting in an appreciation of the domestic currency.
c) A higher domestic inflation rate will lead to an increase in the demand for imports hence an
increase in demand for foreign exchange and a decrease in the supply of foreign exchange,
resulting in a depreciation of the domestic currency.
d) A higher domestic inflation rate will lead to an increase in the demand for imports and decrease in
supply of exports hence an increase in demand for foreign exchange and a decrease in the supply
of foreign exchange, resulting in a depreciation of the domestic currency.

3. Which of the following is true?

a) A lower domestic interest rate leads to an appreciation of domestic currency due to an increase in
the supply of foreign currency and a decrease in demand for foreign currency.
b) A lower domestic interest rate leads to a depreciation of domestic currency due to an increase in
the supply of foreign currency and a decrease in demand for foreign currency.
c) A lower domestic interest rate leads to an appreciation of domestic currency due to a decrease in
the supply of foreign currency and an increase in demand for foreign currency.
d) A lower domestic interest rate leads to a depreciation of domestic currency due to a decrease in the
supply of foreign currency and an increase in demand for foreign currency.

4. Which of the following is true?

a) A higher domestic growth rate will lead to a depreciation of the domestic currency because imports
grow faster than exports, resulting in a larger increase in the demand for foreign exchange than the
supply of foreign exchange.
b) A higher domestic growth rate will lead to a depreciation of the domestic currency because imports
grow slower than exports, resulting in an larger increase in the demand for foreign exchange than
the supply of foreign exchange.

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 c) A higher domestic growth rate will lead to a depreciation of the domestic currency because imports
grow faster than exports, resulting in a larger decrease in the demand for foreign exchange than the
supply of foreign exchange.
d) A higher domestic growth rate will lead to a depreciation of the domestic currency because imports
grow slower than exports, resulting in a larger decrease in the demand for foreign exchange than
the supply of foreign exchange.

5. How does the government influence the foreign exchange market?

a) Directly control the supply and demand of their currency against another currency or a basket of
foreign currencies.
b) Implement macroeconomic policies that directly affect the inflation rate, interest rate and growth
rate.
c) Implement macroeconomic policies that directly affect the unemployment rate.
d) Directly control the gold and oil prices.
e) Impose / abolish trade barriers and taxes.
f) Impose / abolish capital control.

6. Which of the following is true?

a) If there is an expectation of the domestic currency to appreciate, the demand for foreign currency
will increase, leading to an appreciation of the foreign currency.
b) If there is an expectation of the domestic currency to appreciate, the demand for foreign currency
will decrease, leading to an appreciation of the foreign currency.
c) If there is an expectation of the domestic currency to appreciate, the demand for foreign currency
and domestic currency will increase, leading to an appreciation of the domestic currency.
d) If there is an expectation of the domestic currency to appreciate, the demand for domestic currency
will rise and the demand for foreign currency will fall, leading to an appreciation of the domestic
currency.

7. The price of a 13-inch Macbook Air in Australia is AUD1200 and the product is sold in the US for
USD1000. The spot rate S(USD/AUD) is 0.7789. According to Law of One Price, what should be the foreign
currency equivalent of the Australian price of the product?
a) US$1,000
b) US$934.68
c) US$1,200
d) US$999.96

8. The price of a 13-inch Macbook Air in Australia is AUD1200 and the product is sold in the US for
USD1000. The spot rate S(USD/AUD) is 0.7789. If the Law of One Price is in equilibrium, what should the price
be in Australia at the current spot rate?
a) A$1,283.86
b) A$778.90
c) US$1,283.86
d) US$778.90

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9. The price of a 13-inch Macbook Air in Australia is AUD1200 and the product is sold in the US for
USD1000. The spot rate S(USD/AUD) is 0.7789. According to Law of One Price, which of the following
statements is true?
a) Arbitragers will buy the Macbook in the USA and sell it in Australia, implying that AUD is
overvalued.
b) Arbitragers will buy the Macbook in the USA and sell it in Australia, implying that AUD is
undervalued.
c) Arbitragers will buy the Macbook in Australia and sell it in the USA, implying that AUD is
overvalued.
d) Arbitragers will buy the Macbook in Australia and sell it in the USA, implying that AUD is
undervalued.

10. According to relative PPP, what is the rate of change in the exchange rate S(AUD/USD) if the inflation
rate in the US and Australia are 0.5% and 1.5% respectively?
a) -1.00%
b) +1.00%
c) -0.99%
d) +1.45%

11. According to the accurate form of PPP, what is the rate of change in S(AUD/USD) if the inflation rate in
the US and Australia are 0.5% and 1.5% respectively?
a) -1.00%
b) +1.00%
c) 0.99%
d) +1.45%

12. Given S(USD/AUD) = 0.7809, US inflation rate = 0.5%, Australia inflation rate = 1.5%, according to the
relative form of PPP, which of the following is true?
a) US inflation rate is lower than Australia inflation rate; US dollar will appreciate as the exchange rate
increases.
b) US inflation rate is lower than Australia inflation rate; US dollar will appreciate as the exchange rate
decreases.
c) US inflation rate is lower than Australia inflation rate; US dollar will depreciate as the exchange rate
increases.
d) US inflation rate is lower than Australia inflation rate; US dollar will depreciate as the exchange rate
decreases.

13. Given the average S(USD/AUD) in 2014 = 0.8500, the forecast inflation rate for US and Australia in
2015 is 0.5% and 1.5% respectively, calculate the PPP exchange rate?
a) S(USD/AUD) 0.8416
b) S(USD/AUD) 0.8585
c) S(AUD/USD) 0.8416
d) S(AUD/USD) 0.8585

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14. Given S(USD/AUD) = 0.7899, the price of a consumption basket in the US is $100 and the price of the
same basket in Australia is $120. What is the real exchange rate and is it higher or lower than the nominal
exchange rate?
a) 0.6283, higher
b) 0.6283, lower
c) 0.9479, higher
d) 0.9479, lower

15. Given S(USD/AUD) = 0.7899, the price of a consumption basket in the US is $100 and the price of the
same basket in Australia is $120. Which of the following is true?
a) A rise in the real exchange rate implies the competitiveness of Australian exports is enhanced.
b) A rise in the nominal exchange rate implies the competitiveness of Australian exports is enhanced.
c) A rise in the Australian prices implies the competitiveness of Australian exports is enhanced.
d) A fall in the Australian prices implies the competitiveness of Australian exports is enhanced.

16. The Researve Bank of New Zealand announced on 23 July 2015 that the official cash rate is changed
from 3.0% to 3.25%.
The US Federal Reserve cash rate remains at 0.5%. Ceteris paribus, you anticipate the NZD/USD to
a) fall because investors become more interested in investing in NZ than the US.
b) rise because investors become more interested in investing in NZ than the US.
c) fall because investors become more interested in investing in the US than NZ.
d) rise because investors become more interested in investing in the US than NZ.

17. The Flash Manufacturing Purchasing Managers' Index in Japan released on July 23 is 50.9 compared to
a forecast figure of 50.3. The previous month reading was 49.9. From the current account perspective in the
partial supply and demand model, the JPY/USD rate will
a) rise because investors are attracted to economic expansion in Japan.
b) fall because investors are attracted to economic expansion in Japan.
c) remain unchanged
d) cannot be determined

18. The current cash rate for Australia is 2% and New Zealand is 3%. Market analysts are talking about
another interest rate cut by RBA in Australia. You anticipate that NZD/AUD will:
a) rise because investors are attracted to higher expected return in NZ.
b) fall because investors are attracted to higher expected return in NZ.
c) rise because investors are attracted to higher expected return in Australia.
d) remain unchanged.
e) Required more information to answer this question.
19. The Greek Parliament will vote to decide on a subsequent package of prerequisites for further financial
assistance. The Euro/USD will:
a) rise because investors seek safe haven currency amid rising uncertainties in the Eurozone.
b) fall because investors seek safe haven currency amid rising uncertainties in the Eurozone.
c) rise because investors seek higher expected return amid rising risks in the Euro.
d) fall because investors seek higher expected return amid rising risks in the Euro.
e) remain unchanged.

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20. Australian 3rd quarter inflation rate is 0.2% compared to a forecast of 0.1%. Singapore's latest inflation
rate is -0.4%. The SGD/AUD rate will
a) fall due to higher cost of import and lower cost of export from the Singaporean perspective.
b) rise due to higher cost of import and lower cost of export from the Singaporean perspective.
c) fall due to lower cost of import and higher cost of export from the Singaporean perspective.
d) rise due to lower cost of import and higher cost of export from the Singaporean perspective.
e) Remained unchanged.
f) Required additional information to answer this question.

1. If the AUD/USD forward spread is –5.00%, which interpretation is correct?

A. The U.S. dollar is selling forward at a premium against the Australian dollar.
B. The U.S. dollar is selling forward at a discount against the Australian dollar.
C. The Australian dollar is selling forward at a discount against the U.S. dollar.
D. None of the above.

2. Dealer A quotes 0.9301/0.9375 for the AUD/USD exchange rate to Dealer B. The price (in U.S. dollars) at
which B can buy one unit of the Australian dollar is:
A. 0.9301
B. 0.9375
C. 1.0752
D. 1.0667

3. In December 2010, the AUD/USD exchange rate fell from 1.0203 to 0.9980. Calculate the percentage change
in the Australian dollar against the U.S. dollar.
A. -2.19%
B. +2.19%
C. +2.23%
D. -2.23%

4. The term 'foreign exchange' means:

A. foreign reserves held by central banks
B. coins, notes and bank deposits in foreign currencies
C. loans and bonds denominated in foreign currencies
D. foreign coins and banknotes

5. Which of the following items is NOT a stock?

A. Foreign assets held by Australian investors
B. Debt owed by the government of Victoria
C. Exports of live sheep to Saudi Arabia
D. Australian dollar bonds held by Japanese investors

6. The main component of the current account is:

10 | P a g e
 A. the trade balance
B. unilateral transfers
C. the balance of money market transactions
D. the balance of capital market transactions

7. Which of the following is NOT an international economic transaction?

A. Exporting Australian beef to Japan
B. Selling Japanese yen bonds by BHP Billiton to Australian investors
C. Selling Telstra shares to foreign investors
D. Importing crude oil

8. An increase in domestic economic growth rate, greater than that of trading partners, leads to a deterioration in
the current account because it leads to:
A. an increase in imports and a decrease in exports
B. an increase in imports without a corresponding change in exports
C. an increase in unilateral transfers
D. an increase in the demand for foreign services

9. A fall in the exchange rate (S) leads to:

A. an increase in the current account
B. a decrease in the current account
C. no change in the current account
D. an indeterminate effect on the current account, which will ultimately depend on the relative
elasticities of demand for imports and exports

10. The demand for foreign exchange rises as the exchange rate (S) falls because:
A. the demand for imports rises
B. the domestic currency price of imports falls
C. the demand for exports rises
D. both the domestic currency price of imports falls AND the demand for imports rises

11. A change in the exchange rate (S) affects:

A. the domestic currency price of exports
B. the foreign currency price of imports
C. the foreign currency price of exports
D. all of the given answers

12. Arguments FOR a fixed exchange rate do NOT include:

A. fixed exchange rates are more conducive to achieving free international trade
B. fixed exchange rates provide certainty
C. fixed exchange rates are more suitable for small economies
D. fixed exchange rates are more suitable for economies with undiversified export bases

13. The benefits offered by the euro include the following:

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 A. Currency stability and the operations of the European Central Bank reduce inflation and interest rates
B. Businesses and individuals benefit from reduced transaction costs
C. The single currency produces efficiency gains as it is easier to compare wages and prices across the
euro area
D. All of the given answers

14. Assume that one ounce of gold is worth AUD150 and NZD185. Calculate the mint parity for the AUD/NZD
exchange rate:
A. 0.8108
B. 1.2333
C. 35
D. 335

15. The term ‘competitive devaluation’ implies:

A. a devaluation aimed at enhancing competition and the operation of a free market
B. a devaluation that is dictated by free market forces
C. a devaluation that is undertaken by one country in response to a similar measure by another
country
D. none of the given answers

16. Which of the following is NOT a Eurocurrency?

A. US dollars held on deposit held in a branch of a U.S. bank in London
B. Euro-denominated assets of U.S. banks in Asia
C. US dollar-denominated liabilities of a branch of a U.K. bank in Asia
D. Euro-denominated deposits held in a branch of a U.K. bank in Berlin

17. The demand for imports function is:

Qm = 40-1.5Pm
The foreign price of imports is 10 and the exchange rate (domestic/foreign) is 1.50.
Calculate the demand for foreign exchange at this rate.
A. 25
B. 17.5
C. 375
D. 175

18. Which of the following statements is true in relation to the interest rates on Eurocurrencies?
A. The offer rate is determined by the intersection of the quoting bank’s demand curve and the
other parties’ supply curve
B. Lending banks add a risk premium appropriate for the credit or default risk of the borrower
C. The bid rate is determined by the intersection of the quoting bank’s supply curve and the other
parties’ demand curve
D. None of the given answers

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19. On 12 August, a Commonwealth Bank dealer in Melbourne concluded a transaction with a Citibank dealer in
New York. The former agreed to buy from the latter USD5 000 000 at an exchange rate (AUD/USD) of 0.9876 for
delivery on 14 August. On the delivery date, the exchange rate rose to 1.83. How much would the
Commonwealth Bank be required to pay to settle the transaction?
A. USD 4,938,000
B. AUD 4,938,000
  C. USD 5,062,778
  D. AUD 5,062,778

20. You are given the following information:

USD/AUD exchange rate index (31/12/02) 102.20
GBP/AUD exchange rate index (31/12/02) 95.07
US’s share of Australia’s two-way merchandise trade 74%
UK’s share of Australia’s two-way merchandise trade 26%
Calculate the geometric trade-weighted effective exchange rate as at 31/12/02.
A. 98.63
B. 96.87
C. 100.35
D. 100.30

21. You are given the following information:

Australia’s nominal effective exchange rate as a geometric average of the USD/AUD and the JPY/AUD, with a
2000 base equal to 100 (31/12/02) 104.0
Australia’s CPI with a 2000 base equal to 100 (31/12/02) 106.2
US’s CPI with a 2000 base equal to 100 (31/12/02) 104.4
Japan’s CPI with a 2000 base equal to 100 (31/12/02) 98.3
US’s share of Australia’s two-way merchandise trade 47%
Japan’s share of Australia’s two-way merchandise trade 53%
Calculate the real geometric trade-weighted effective exchange rate as at 31/12/02.
A. 109.2
B. 99.0
C. 109.0
D. 99.2

22. If the domestic currency is expected to appreciate:

A. the current account is expected to be unaffected
B. the financial account is expected to deteriorate
C. the current account is expected to improve
D. the financial account is expected to improve

23. You are given the following information:

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US’s share of Australia’s two-way merchandise trade 14%
UK’s share of Australia’s two-way merchandise trade 5%
Calculate the normalised trade weight for the UK’s share of Australia’s two-way merchandise trade.
A. 14.00%
B. 35.71%
C. 5.00%
D. 26.32%

24. You are given the following exchange rates:

EUR/USD 0.9395/0.9681
AUD/USD 1.7624/1.7864
JPY/AUD 65.91/67.71
Calculate the EUR/AUD cross OFFER rate.
A. 0.5493
B. 0.5259
C. 0.5419
D. 0.5331

25. The following are the spot and the swap forward rates of the AUD/USD.
Spot 1.7652/1.7672
One-month 40/20
This means that:
A. the U.S. dollar is selling at a forward discount.
B. the U.S. dollar is selling at a forward premium.
C. the Australian dollar is selling at a forward discount.
D. after allowing for transaction costs, both currencies sell at par.

26. In 2002, the EUR/AUD exchange rate fell from 0.5764 to 0.5403.
Calculate the percentage change in the Australian dollar against the euro.
A. +6.26%
B. -6.26%
C. +6.68%
D. -6.68%

27. You are given the exchange rate AUD/USD 1.7662. Calculate the indirect quote of the Australian dollar from
an Australian viewpoint.
A. AUD/USD 0.5662
B. USD/AUD 1.7662
C. AUD/USD 1.7662
D. USD/AUD 0.5662

28. If the AUD/USD exchange rate declines from 1.9585 to 1.7662, then the fall is equal to:

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 A. 1,923 points.
B. 192,300 pips.
C. 19.23 points.
D. 1,923 pips.

1. The bid exchange rate is determined by:

A. the demand by customers and the supply by market makers
B. the supply by customers and the demand by market makers
C. the demand by customers and the demand by market makers
D. The supply by customers and supply by market makers

2. The offer exchange rate is determined by

A. the demand by customers and the supply by market makers
B. the supply by customers and the demand by market makers
C. the demand by customers and the demand by market makers
D. the supply by customers and the supply by market makers

3. The presence of the bid-offer spread in foreign exchange transactions:

A. reduces the profitability of speculation, because speculators buy at the offer rate and sell at the
bid rate
B. raises the profitability of speculation, because speculators buy at the bid rate and sell at the
offer rate
C. does not affect the profitability of speculation, since speculators face a zero bid-offer spread
D. raises the profitability of speculation, because speculators buy at the offer rate and sell at the
bid rate

4. If a fixed exchange rate is set above the equilibrium rate, it will create:
A. a deficit in the domestic balance of payments
B. a surplus in the domestic balance of payments
C. inflation
D. deflation

5. Problems associated with the dual exchange rate system include:

A. the commercial rate may be set at such a low level to make the domestic currency overvalued,
which will have an adverse effect on the economy
B. the system works properly only if the two foreign exchange markets are segmented
C. the system works properly only if the two foreign exchange rates are closely related
D. all of the given answers

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6. If the foreign currency equivalent of the domestic price of a commodity is less than the foreign price of the
same commodity, then the derivation of PPP implies that:
A. the foreign currency is overvalued
B. the foreign currency is undervalued
C. the domestic currency is overvalued
D. none of the given answers

7. You are given the exchange rate AUD/USD 0.9297/0.9304. Calculate the direct quote of the U.S. dollar from
an American viewpoint.
A. AUD/USD 0.9297/0.9304
B. AUD/USD 0.9304/0.9297
C. USD/AUD 1.0756/1.0748
D. USD/AUD 1.0748/1.0756

8. If PPP holds precisely, then the real exchange rate will be:
A. Stationary
B. Volatile
C. mean reverting
D. constant
9. Assuming the exchange rate is measured in direct quotation and that a PPP trading rule is adopted, if the
actual exchange rate is lower than the PPP rate, then:
A. the foreign currency should be bought
B. the foreign currency should be sold
C. the foreign currency should be sold short
D. the foreign currency should be sold and/or the foreign currency should be sold short

10. At the beginning of 2003 the AUD/USD exchange rate was 1.7662. At the same time, the forecast change in
the AUD/USD in 2003 was 2.00% and the forecast inflation rate for the US in 2003 was 1.50%. What should be
the forecast inflation rate for Australia in 2003, according to PPP theory?
A. 3.53%
B. 0.50%
C. -0.50%
D. -3.50%

11. According to the monetary model of exchange rates, an expansion of the money supply will lead to:
A. a depreciation of the domestic currency
B. an appreciation of the domestic currency
C. a depreciation of the foreign currency
D. no change in the value of the domestic currency

Question 1

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A foreign exchange transaction consists of the following sequential process:
(a) Decision making; Execution; Settlement; Price discovery; and Position keeping.
(b) Price discovery; Decision making; Execution; Settlement; and Position keeping.
(c) Decision making; Price discovery; Execution; Settlement; and Position keeping.
(d) Decision making; Execution; Price discovery; Settlement; and Position keeping.

Question 2
You are given the following information:
Nominal effective AUD/USD exchange rate index at end of 2017 (based on 100.00 at end of 1999) 92.50
Australian CPI at end of 2017 (based on 100 at end of 1999) 105
US CPI at end of 2017 (based on 100 at end of 1999) 102
Calculate the real effective AUD/USD exchange rate index at end of 2017.
(a) 95.22
(b) 97.13
(c) 100.00
(d) 89.86

Question 3
You are given the following information:
USD/AUD exchange rate index (31/12/2017) 102.20
GBP/AUD exchange rate index (31/12/2017) 95.07
US’s share of Australia’s two-way merchandise trade 74%
UK’s share of Australia’s two-way merchandise trade 26%
Calculate the arithmetic trade-weighted effective exchange rate as at 31/12/2017
(a) 98.63
(b) 96.87
(c) 100.35
(d) 100.30

Question 4
Ignore the impact of price elasticity, a rise in the exchange rate, S(d/f), may lead to:
(a) A rise in the foreign currency price of exports and a fall in the quantity of exports demand
(b) A fall in the foreign currency price of exports and a rise in the quantity of exports demand
(c) No change in the foreign currency price of exports and a rise in the quantity of exports demand
(d) A rise in the foreign currency price of exports and a rise in the quantity of exports demand

Question 5
The short term J-curve effect describes:
(a) The inverse relationship between the current account and the growth rate
(b) The tendency for the current account to deteriorate immediately after the depreciation of the domestic
currency
(c) The tendency for exporters to reduce the foreign price of exports following the appreciation of the
domestic currency
(d) The depreciation of the domestic currency immediately after a fall in the domestic inflation rate

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Question 6
The exchange rate between the British pound and the Australian dollar (GBP/AUD) rose from 0.6265 to 0.6427 in
one week. Has the British pound appreciated or depreciated, and by how much?
(a) Depreciated; 2.52%
(b) Appreciated; 2.52%
(c) Appreciated; 2.59%
(d) Depreciated; 2.59%

Question 7
The demand for foreign exchange rises as the exchange rate (S) falls because:
(a) The demand for imports rises
(b) The domestic currency price of imports falls
(c) The demand for exports rises
(d) Both the domestic currency price of imports falls and the demand for imports rises

Question 8
Dealer A quotes 0.9301/0.9375 for the USD/AUD exchange rate to Dealer B. the price (in Australian dollars) at
which B can sell one unit of the Australian dollar is:
(a) 0.9301
(b) 0.9375
(c) 1.0752
(d) 1.0667

Question 9
According to the monetary model, what will be the impact on domestic currency of a rise in real domestic
income?
(a) The domestic currency will depreciate
(b) The domestic currency will appreciate
(c) The value of the domestic currency will remain the same
(d) The value of the domestic currency will change

Question 10
You are given the following exchange rates:
USD/EUR 1.3165
USD/AUD 0.9986
JPY/USD 82.08
Calculate the EUR/JPY cross rate.
(a) 0.0085
(b) 0.0083
(c) 0.0093

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 (d) 0.0077

Question 11
You are given the following the following information:
Elasticity of demand for exports -0.2
Per annum change in the US dollar price of exports -5.0%
Quantity of exports 500
Quantity of imports 400
AUD/USD exchange rate 1.8769
What is the quantity of exports at the end of one year?
(a) 475
(b) 525
(c) 505
(d) 495

Question 12
Taxes imposed on capital gains and dividend income:
(a) Many adversely affect the financial account
(b) Many adversely affect the current account
(c) Many positively affect the current account
(d) Many positively affect the financial account

Question 13
Dealer A quotes 0.9301/0.9375 for the USD/AUD exchange rate to Dealer B. the price (in Australia dollars) at
which B can sell one unit of the Australian dollar is:
(a) 0.9301
(b) 0.9375
(c) 1.0752
(d) 1.0667

Question 14
If the exchange rate is expected to appreciate
(a) The current account is expected to be unaffected
(b) The financial account is expected to deteriorate
(c) The current account is expected to improve
(d) The financial account is expected to improve
Question 15
A foreign exchange transaction consists of the following sequential process:
(a) Price discovery, Decision making, Execution, Settlement; and Position keeping
(b) Decision making, Price discovery, Execution, Settlement; and Position keeping
(c) Decision making, Execution, Price discovery, Settlement; and Position keeping
(d) Decision making, Execution, Settlement, Price discovery; and Position keeping

Question 16
The short term J-curve effect describe

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 (a) The inverse relationship between the current account and the growth rate
(b) The tendency for the current account to deteriorate immediately after the depreciation of the domestic
currency
(c) The tendency for exporters to reduce the foreign price of exports following the appreciation of the
domestic currency
(d) The depreciation of the domestic currency immediately after a fall in the domestic inflation rate.

Question 17
According to the monetary model, what will be the impact on domestic currency of a rise in the domestic income?
(a) The domestic currency will depreciate
(b) The domestic currency will appreciate
(c) The value of the domestic currency will remain the same
(d) The value of the domestic currency will change

1. The demand for foreign exchange rises as the exchange rate (S) falls because:
(a) The demand for imports rises
(b) The domestic currency price of imports falls
(c) The demand for exports rises
(d) Both the domestic currency price of imports falls and the demand for imports rises

2. Dealer A quotes 0.9301/0.9375 for the USD/AUD exchange rate to Dealer B. the price (in USD) at which
B can sell one unit of the Australian dollar is:
(a) 0.9301
(b) 0.9375
(c) 1.0752
(d) 1.0667

3. According to the monetary model, what will be the impact on domestic currency of a rise in real
domestic income?
(a) The domestic currency will depreciate
(b) The domestic currency will appreciate
(c) The value of the domestic currency will remain the same
(d) The value of the domestic currency will change

4.
5. You are given the following information:
Nominal effective AUD/USD exchange rate index at end of 2017 92.50
(based on 100.00 at end of 1999)
Australian CPI at end of 2017 (based on 100 at end of 1999) 105
US CPI at end of 2017 (based on 100 at end of 1999) 102
Calculate the real effective AUD/USD exchange rate index at end of 2017.
(a) 95.22
(b) 97.13
(c) 100.00

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 (d) 89.86

6. You are given the following information:

USD/AUD exchange rate index (31/12/2017) 102.20
GBP/AUD exchange rate index (31/12/2017) 95.07
US’s share of Australia’s two-way merchandise trade 74%
UK’s share of Australia’s two-way merchandise trade 26%
Calculate the arithmetic trade-weighted effective exchange rate as at 31/12/2017.
(a) 98.63
(b) 96.87
(c) 100.35
(d) 100.30

7. Ignore the impact of price elasticity, a rise in the exchange rate, S(d/f), may lead to:
(a) A rise in the foreign currency price of exports and a fall in the quantity of exports demanded
(b) A fall in the foreign currency price of exports and a rise in the quantity of exports demanded
(c) No change in the foreign currency price of exports and a rise in the quantity of exports demanded
(d) A rise in the foreign currency price of exports and a rise in the quantity of exports demanded

8. The exchange rate between the British pound and the Australian dollar (GBP/AUD) rose from 0.6265 to
0.6427 in one week. Has the British pound appreciated or depreciated, and by how much?
(a) Depreciated; 2.52%
(b) Appreciated; 2.52%
(c) Appreciated; 2.59%
(d) Depreciated; 2.59%

9. The short term J-curve effect describes:

(a) The inverse relationship between the current account and the growth rate
(b) The tendency for the current account to deteriorate immediately after the depreciation of the
domestic currency
(c) The tendency for exporters to reduce the foreign price of exports following the appreciation of the
domestic currency
(d) The depreciation of the domestic currency immediately after a fall in the domestic inflation rate

10. You are given the following exchange rates:

USD/EUR 1.3165
USD/AUD 0.9986
JPY/USD 82.08
Calculate the EUR/JPY cross rate.
(a) 0.0085
(b) 0.0083
(c) 0.0093
(d) 0.0077

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11. The inflation rate is forecast to be 3.5% in Australia and 2.3% in the U.S. the current spot rate AUD/USD
is 1.2771.
Ceteris paribus, the supply of foreign exchange rate to shift____ and the demand for foreign exchange
to shift____; hence, the exchange rate will____.
(a) Rightward; leftward; rise
(b) Rightward; leftward; fall
(c) Leftward; rightward; rise
(d) Leftward; rightward; fall

12. Taxes reduced on capital gains and dividend income:

(a) May adversely affect the financial account
(b) May adversely affect the current account
(c) May positively affect the current account
(d) May positively affect the financial account

13. Balance of payments difficulties are a source of concern for the finance manager because:
(a) They do not affect exchange rates
(b) They affect exchange rate
(c) They create constraints on economic policy
(d) All of the answers given

14. If the exchange rate between the Australia dollar and the British pound is expressed in indirect quotation
from an Australian perspective, then a fall in the exchange rate implies:
(a) Depreciation of the pound
(b) Appreciation of the Australian dollar
(c) Depreciation of the Australian dollar
(d) Both depreciation of the pound and appreciation of the Australian dollar

15. The term ‘international business firm’ refers to:

(a) A firm engaged in cross border activities such as importing and exporting, without necessarily
engaging in offshore production or ownership of foreign assets
(b) A firm engaged in production in another country
(c) A firm which owns a subsidiary located in another country
(d) A firm which is known around the world for its quality

16. Which of the following occurs when the exchange rate increases and the elasticity of export and import
demand is low?
(a) Exports and imports will not change
(b) Exports will decrease by a small amount and imports will increase by a small amount
(c) There will be a large change in exports and imports
(d) Exports will increase by a small amount and imports decrease by a small amount

17. If a country’s currency is expected to appreciate:

(a) The current account of that country is expected to be unaffected
(b) The financial account of that country is expected to deteriorate

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 (c) The current account of that country is expected to improve
(d) The financial account of that country is expected to improve

18. Importers participate in the foreign exchange rate market because:

(a) The market provides letters of credit
(b) The market provides short-term loans
(c) They need foreign currency to pay for imported goods
(d) Foreign exchange brokers bring together importers and exporters

19. The U.S. dollar is the most heavily traded currency on the foreign exchange market for all of the
following reasons EXCEPT:
(a) It is a major component of international reserves
(b) It is used to settle international transactions
(c) The U.S. is the largest consumer of oil which is priced in U.S. dollar
(d) The sheer size of the U.S. financial markets

20. Financial market integration requires:

(a) Free capital movement
(b) Substitutability between domestic and foreign assets
(c) Membership of a currency area
(d) Both free capital movement and substitutability between domestic and foreign assets

1. You were provided the following exchange rates

GBP/AUD 0.3891
EUR/AUD 0.6674
EUR/GBP 0.6075
Find the profitable arbitrage sequence.
a. AUD -> GBP -> EUR -> AUD
b. AUD -> EUR -> GBP -> AUD
c. GBP -> AUD -> EUR -> GBP
d. EUR-> AUD -> GBP -> EUR

2. You are given the following information:

Spot exchange rate (AUD/EUR) 1.60
6-month forward rate (AUD/EUR) 1.62
6-month interest rate on the Australian dollar 8.5% p.a.
6-month interest rate on the euro 6.5% p.a.
What is the covered margin of inward covered arbitrage from the Australian perspective?
a. -0.0067
b. 0.0125
c. 0.0200
d. -0.0029

23 | P a g e
3. The current AUD/EUR exchange rate is 1.60, the Australian six-month interest rate is 8.5 per cent p.a. and the
six-month interest rate on the euro is 6.5 per cent p.a. Calculate the interest rate differential, where will the
exchange rate be in six months-time if UIP holds and will AUD appreciate or depreciate?
a. 0.5%, 1.6080, appreciate
b. 0.5%, 1.6080, depreciate
c. 1.0%, 1.6160, appreciate
d. 1.0%, 1.6160, depreciate

QUESTION 1
In a currency swap involving A receiving euro payments and B receiving Australian dollar payments, a rise in the
actual exchange rate expressed as (EUR/AUD) implies:
(a) appreciation of the euro and a loss incurred by B
(b) depreciation of the euro and a loss incurred by A
(c) appreciation of the Australian dollar and a loss incurred by A
(d) depreciation of the Australian dollar and a loss incurred by A

QUESTION 2
If unbiased efficiency holds then:
(a) forward hedging will be useful in the long run
(b) forward hedging will be unnecessary in the long run
(c) forward hedging will be unnecessary in the short run and the long run
(d) hedging will be successful only if it is based on a spot exchange rate forecast other than the forward rate

QUESTION 3
A decision to hedge payables in the money market will be taken if:
(a) the domestic interest rate is higher than the foreign interest rate
(b) the domestic interest rate is lower than the foreign interest rate
(c) the interest parity forward rate is higher than the expected spot rate
(d) the interest parity forward rate is lower than the expected spot rate

QUESTION 4
If the foreign currency is expected to appreciate and there are no hedging instruments available, you might still
hedge the receivables position by:
(a) buying forward a currency which has a strong positive correlation with the foreign currency in question
(b) buying forward a currency which has a strong negative correlation with the foreign currency in question
(c) selling forward a currency which has a strong positive correlation with the foreign currency in question
(d) selling forward a currency which has a strong negative correlation with the foreign currency in question

QUESTION 5
If the foreign currency is expected to appreciate to a value in excess of the appropriate forward rate:

24 | P a g e
(a) a hedger will hedge foreign receivables by buying the foreign currency forward
(b) a hedger will hedge foreign receivables by selling the foreign currency forward
(c) a hedger will not hedge foreign receivables
(d) a hedger will regret his decision to hedge foreign receivables if the foreign currency is higher than the forward
rate at maturity

QUESTION 6
If a forecast indicates that the spot exchange rate will be lower than the forward rate on the maturity date of the
forward contract:
(a) a speculator will buy forward and sell spot upon delivery
(b) a speculator will sell forward and sell spot upon delivery
(c) a speculator will buy forward and buy spot upon delivery
(d) a speculator will sell forward and buy spot upon delivery

QUESTION 7
If the forward rate is used as a forecaster of the spot rate:
(a) the forecasting error equals the difference between the current spot rate and the forward rate at the maturity
of the forward contract
(b) the forecasting error equals the difference between the current forward rate and the spot rate at the maturity
of the forward contract
(c) the forecasting error equals the difference between the current forward rate and the current spot rate
(d) none of the given answers

QUESTION 8
If the underlying currency is expected to depreciate:
(a) a speculator will go long a call option or long a put option
(b) a speculator will go long a call option or short a put option
(c) a speculator will go short a call option or long a put option
(d) a speculator will go short a call option or short a put option

QUESTION 9
You are given the following information:
Elasticity of demand for exports -0.2
Per annum change in the US dollar price of exports -6.0%
Quantity of exports 500
Quantity of imports 400
AUD/USD exchange rate 1.8769
REQUIRED:
What is the quantity of exports at the end of one year?
(a) 474
(b) 526

25 | P a g e
 (c) 506
(d) 494

QUESTION 10
The ask exchange rate is determined by:
(a) the demand by customers and the supply by market makers
(b) the supply by customers and the demand by market makers
(c) the demand by customers and the demand by market makers
(d) the supply by customers and the supply by market makers

QUESTION 11
The bid exchange rate is determined by:
(a) the demand by customers and the supply by market makers
(b) the supply by customers and the demand by market makers
(c) the demand by customers and the demand by market makers
(d) the supply by customers and the supply by market makers

QUESTION 12
A trader buys a call option. The call option gives him the right to buy AUD1 million at an exercise exchange rate
of 0.9050 (USD/AUD).
REQUIRED:
Calculate the trader’s gross profit on expiry, assuming the exchange rate is 0.9200 at expiry.
(a) –AUD15,500
(b) +USD15,500
(c) +AUD15,500
(d) –USD15,500

QUESTION 13
Which of the following items is NOT a stock?
A. Foreign assets held by Australian investors
B. Debt owed by the government of Victoria
C. Exports of live sheep to Saudi Arabia
D. Australian dollar bonds held by Japanese investors

QUESTION 14
If a fixed exchange rate is set above the equilibrium rate, it will create:
A. a deficit in the domestic balance of payments
B. a surplus in the domestic balance of payments
C. inflation
D. deflation

QUESTION 15
UIP implies that:
(a) the currency offering the lower interest tends to depreciate

26 | P a g e
 (b) neither of the currencies is expected to change since it is implicitly assumed that the expected
change in the exchange rate is zero
(c) the currency offering the higher interest rate tends to depreciate
(d) none of the above

QUESTION 16
The JPY/USD exchange rate falls from 92.12 to 85.20. The Bank of Japan intervenes in the foreign exchange
market by selling 1 billion yen.
REQUIRED:
Ceteris paribus, the government intervention will cause the supply of foreign exchange to shift _______ and the
demand for foreign exchange to shift ________; leading to a ________ in the JPY/USD exchange rate.
(a) leftward; rightward; rise
(b) rightward; leftward; fall
(c) unchanged; leftward; fall
(d) unchanged; rightward; rise

QUESTION 17
At the beginning of 2013 the AUD/USD exchange rate was 1.0845 and the 2013 inflation rates were 3.25% for
Australia and 2.35% for the US.
REQUIRED:
What should the AUD/USD PPP exchange rate be at the beginning of 2014?
(a) USD/AUD 0.9153
(b) AUD/USD 1.0940
(c) AUD/USD 1.0750
(d) none of the above

QUESTION 18
Which of the following is an example of when speculation can be stabilising?
(a) In a bull market, speculators keep selling the currency
(b) In a bear market, speculators keep buying the currency
(c) A currency is undervalued and speculators sell the currency
(d) A currency is overvalued and speculators sell the currency.

QUESTION 19
The direct quotation for the exchange rate between the Australian dollar and the US dollar is 1.702 (AUD/USD) in
Sydney and 0.5745 (USD/AUD) in New York. What profit could be made by arbitrage trading?
(a) 90 basis points
(b) 500 basis points
(c) 130 basis points
(d) No profitable arbitrage opportunity exists.

QUESTION 20
Purely domestic firms are exposed to foreign exchange risk because:

27 | P a g e
 (a) changes in the exchange rate may affect domestic interest rates, prices, and sales
(b) changes in the exchange rate affect the value of the country’s foreign assets.
(c) they borrow from overseas
(d) they import raw materials from overseas

QUESTION 21
The spot and forward exchange rates between Australia dollar and the euro (AUD/EUR) are as follows:
Spot: 1.6030
One month forward: 1.6260
REQUIRED:
Calculate the forward spread in percentage per annum. State whether the Australian dollar sells at a premium or
a discount
(a) 17.2%; premium
(b) -17.2%; discount
(c) -17.0%; premium
(d) 17.0%; discount

QUESTION 22
Foreign exchange transaction exposure arises:
(a) if payables are denominated in the local currency
(b) if receivables are denominated in a foreign currency
(c) irrespective of the currency payables and receivables are denominated in
(d) only for multinational companies

QUESTION 23
Can a profitable arbitrage trading strategy be implemented if the following exchange rates are quoted in Sydney,
Auckland and Hong Kong. Sydney (HKD/AUD) 4.2500; Auckland (NZD/AUD) 1.2545; Hong Kong (HKD/NZD)
3.6556.
(a) No profitable arbitrage opportunity exists.
(b) Yes, selling HKD in Sydney for AUD, then selling the AUD in Auckland for NZD and finally selling
the NZD in Hong Kong for HKD.
(c) Yes, selling NZD in Hong Kong for HKD, then selling the HKD in Auckland for AUD and finally
selling the AUD in Sydney for HKD.
(d) Yes, selling HKD in Hong Kong for NZD, then selling the NZD in Auckland for AUD and finally
selling the AUD in Sydney for HKD.
Dealer A quotes 66.12/67.71 for the JPY/AUD exchange rate to Dealer B. What is:
(a) the price at which A is willing to buy the Australian dollar?
(b) the price at which A is willing to buy the Japanese yen?
(c) the price at which B can buy the Australian dollar?
(d) the price at which B can buy the Japanese yen?
(e) the price at which A is willing to sell the Australian dollar?
(f) the price at which A is willing to sell the Japanese yen?
(g) the price at which B can sell the Australian dollar?
(h) the price at which B can sell the Japanese yen?

28 | P a g e
Dealer A quotes 0.6030-0.6050 for the EUR/AUD exchange rate to Dealer B. What are the following:
(a) The price at which A is willing to buy the Australian dollar?
(b) The price at which A is willing to the buy the Euro?
(c) The price at which B can buy the Australian dollar?
(d) The price at which B can buy the Euro?
(e) The price at which A is willing to sell the Australian dollar?
(f) The price at which A is willing to sell the Euro?
(g) The price at which B can sell the Australian dollar?
(h) The price at which B can sell the Euro?

29 | P a g e
The following exchange rates are quoted:
USD/AUD 0.5674
JPY/AUD 70.43
GBP/AUD 0.3891
EUR/AUD 0.6075
Calculate the following cross rates: JPY/USD, GBP/USD, EUR/USD, JPY/GBP, JPY/EUR and EUR/GBP.

30 | P a g e
The demand for imports function is:
Qm = 75 - 2.0Pm
a. Calculate the quantity of imports if the foreign price of imports is 10 and the exchange rate
(domestic/foreign) is 2.10.

b. Also calculate the demand for foreign exchange at this rate.

c. Calculate the quantity of foreign exchange demanded at the following values of the exchange rate: 2.20,
2.30, 2.40, 2.50, 2.60, 2.70 and 2.80.

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The demand for exports function is:
Qx = 40 - 4P*x
a. Calculate the quantity of exports if the domestic price of exports is 20 and the exchange rate
(domestic/foreign) is 2.10.

b. Also calculate the supply of foreign exchange at this rate.

c. Calculate the quantity of foreign exchange demanded at the following values of the exchange rate: 2.20,
2.30, 2.40, 2.50, 2.60, 2.70 and 2.80. Plot the supply of foreign exchange curve.

32 | P a g e
You are given the following information:
Quantity of exports 500
Domestic currency price of exports 10
Exchange rate 1.2
(a) Calculate the foreign currency and domestic currency values of exports.

(b) What will happen if the exchange rate falls to 0.90, assuming that the value of the elasticity of demand
for exports is -0.2? What if elasticity is -1.8?

33 | P a g e
Quantity of imports 200

Foreign currency price of imports 20

Exchange rate (S(d/f)) 1.5

(a) Calculate the foreign currency and domestic currency value of imports.

(b) What will happen to domestic currency value of imports if the exchange rate falls to 1.20, assuming that
the value of the elasticity of demand for imports is -0.5 and foreign currency price of imports remains
unchanged of $20?

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Between 1980 and 1995, the ¥/$ exchange rate moved from ¥226.63/$ to ¥93.96. During this period, the
CPI in Japan rose from 91.0 to 119.2 and the U.S. CPI rose from 82.4 to 152.4.

(a) If PPP had held over this period, what would the ¥/$ exchange rate have been in 1995?

(b) What happened to the real value of the yen in terms of dollars during the period?

35 | P a g e
Between April 1980 and April 2017, the ¥/$ exchange rate moved from ¥226.63/$ to ¥108.96/$. During this
period, the CPI in Japan rose from 91.0 to 99.8 and the U.S. CPI rose from 82.4 to 243.75. Assume
Japanese Yen (¥) is domestic currency.

(a) If purchasing power parity had held over this period, what would the ¥/$ exchange rate have been in
2017?

(b) What happened to the real value of the yen in terms of dollars ($) during this period?

36 | P a g e
The USD/AUD exchange rate is quoted as 0.4977-0.5176.
(a) What is the bid-offer spread in points and in percentage terms?
(b) What is the monetary value of a point in this case?
(c) Calculate the AUD/USD exchange rate. What is the bid-offer spread in points and in percentage
terms? What is the monetary value of a point in this case?

37 | P a g e
The dealers’ demand and supply functions are:
Qd=10-2.5Sb
Qs=5+3.5Sa
Where Qd and Qs are the quantities supplied and demanded by dealers. The customers’ demand and
supply functions are:
Qd=12-2.3Sa
Qs=2+4.2Sb
Calculate the bid-offer spread.

38 | P a g e
The following exchange rates are quoted simultaneously in Sydney, Frankfurt and Zurich:
AUD/EUR 1.6400
CHF/AUD 0.8700
CHF/EUR 1.4600
a) Is there a possibility for two point arbitrage?
b) Is there a possibility for three point arbitrage?
c) If so, what is the profitable sequence?
d) What is the profit earned from arbitrage?
e) How do the three exchange rates change as a result of arbitrage?
f) What is the value of the CHF/EUR exchange rate that eliminates the possibility for profitable
arbitrage?

(a) There is no possibility for two-point arbitrage since the exchange rates are equal across financial centres.

39 | P a g e
(b) A possibility for three-point arbitrage exists if the equilibrium condition of the consistency of cross exchange
rates is violated. The equilibrium is:
S (CHF / AUD )
S (CHF / EUR)=
S ( EUR / AUD )
=S(CHF / AUD)×S ( AUD / EUR )=0 . 8700×1 .6400=1. 4268
Since the calculated CHF/EUR rate is different from the rate that is actually quoted (1.4600), it follows that there
is a possibility for three-point arbitrage.

(c)
Suppose that we start with one Australian dollar.
This Australian dollar amount is sold against the Euros to obtain (1/1.6400) = 0.6098 euros.

This Euros amount is sold against the Swiss franc to obtain ( 0.6098×1. 4600) = 0.8903 francs.

The Swiss franc amount is sold against the Australian dollar to obtain ( 0 . 8903/0 .8700 ) = 1.0233 Australian
dollars.
Therefore the profitable sequence is AUD → EUR → CHF → AUD.

(d) An arbitrager starting with one Australian dollar will end up with 1.0233 dollars. So the profit earned per
Australian dollar is AUD0.0233 or 2.33 cents.

(e)
Selling the Australian dollar against the euro leads to a rise in the AUD/EUR rate.
Selling the euro against the Swiss franc leads to a fall in the CHF/EUR rate.
Selling the Swiss franc against the Australian dollar leads to a rise in the CHF/AUD rate.

(f)
The value of the CHF/EUR rate that eliminates the possibility for profitable arbitrage is calculated in (b) as
1.4268.
It is easy to verify that there is no profitable sequence at this exchange rate.

An Australian company owes a Swiss exporter CHF 250,000 due in six months. The following information is
available:
Spot exchange rate (AUD/CHF) 1.15
Australian six-month interest rate 10.5% p.a.
Swiss six-month interest rate 6.5% p.a.
(a) Calculate the Australian dollar value of payables under a money market hedge
(b) Calculate the implicit forward rate
(c) If the spot exchange rate in six months is expected to be 1.20, will the hedge be taken? What if it is
1.10?

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