INTERNATIONAL FINANCE EXAM NAME...................................................................

SUBJECT 4 FORENAME........................................................

CLASS.................................................................

Assessment: Seminar: 4 points; Exam: 6 points; Total 10 points

Condition for adding the seminar points to the final assessment: obtaining at list 50% from the final exam
points

I. Choose the correct answer and explain (each question = 0.5 points; total 7 points). The points for each
question will be split as follows: 0.15 points for choosing the correct answer and 0.35 points for
explanation:

1. It is a criteria that must be fulfilled in order to adopt euro: a) interest rate must be not more than 1.5
percentage points above the rate of the three best performing Member States in terms of price stability; b)
inflation must be not more than 1.5 percentage points above the rate of the three best performing Member
States; c) public debt must be less than 3% from GDP; d) government deficit must be less than 2% from GDP.
Choose the correct answer and why the other options are not correct.
Correct answer:
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2. Domestic currency appreciation has as effect: a) domestic demand orientation to internal markets; b) internal
demand orientation to national goods; c) current account improvement; d) reorientation of domestic supply to
the domestic market. Explain why you choose a certain answer.
Correct answer:
Explanation ______________________________________________________________________________
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3. Uncovered interest rate parity: a) compares investment alternatives for two currencies; b) supposes the
existence of arbitrage possibilities; c) explain the exchange rate evolution trough the interest rate differential; d)
is true on short term. Which sentence is false? Explain why is false.
Correct answer:
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4. Exchange rate crisis which appear in the case of the fixed exchange rate can be prevent through: a) capital
control; b) decrease of transparency of the macroeconomic policy institution action; c) decrease of the
international reserves level; d) change in money demand. Explain why you choose a certain answer.
Correct answer:
Explanation ______________________________________________________________________________
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5. Choose the correct answer regarding the long run monetary approach: a) the exchange rate variation is
explained by the differential in nominal money supply growth rate and the differential in real output growth
rate; b) if money offer increase in the country of the variable currency, then variable currency appreciate; c) the
exchange rate equals relative real money demand divided by the relative nominal money supply; d) if the
variable currency output growth rate is higher, variable currency will depreciate. Explain why one of other
answers is wrong.
Correct answer:
Explanation ______________________________________________________________________________
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6. Monetary influence factors for the exchange rate evolution are: 1) GDP evolution; 2) money offer; 3) prices
evolution; 4) credit; 5) interest. It is true the combination: a) 1+4+5; b) 1+3; c) 2+4+5; d) 2+3+5. Explain why
you choose a certain combination.
Correct answer:
Explanation ______________________________________________________________________________
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7. Which sentence regarding the Fisher Effect is not true: a) nominal interest rate differential is equal with the
expected inflation differential; b) news have an influence on the exchange rate; c) the arbitrage on the goods and
financial markets is sufficient in order to equalize the exchange rate between the countries; d) the change in the
opportunity cost of money is higher than the change in nominal interest rate. Explain for one of the other
choices why cannot be chosen.
Correct answer:
Explanation ______________________________________________________________________________
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8. Regarding the carry trade, we have the following sentences: a) if UIP works, a profit is expected; b) implies a
placement in a high interest rate currency; c) transaction has no leverage effect; d) expected profit is equal with
external interest rate plus internal interest rate plus exchange rate variation. Choose the correct answer and
explain.
Correct answer:
Explanation ______________________________________________________________________________
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9. Into the capital and financial accounts of the balance of payments are not reflected: a) investments longer
than one year; b) credits from IMF; c) receivables and payables due to the goods and services export and
import; d) portfolio investments. Explain why you choose a certain answer.
Correct answer:
Explanation ______________________________________________________________________________
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10. Purchasing power parity theory: a) compares the interest rates from two countries; b) has only a relative
form; c) can be covered and uncovered; d) is based on the law of one price. Explain why one of other answers is
wrong.
Correct answer:
Explanation ______________________________________________________________________________
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11. Extra contractual operations for exchange rate risk coverage include: a) swap contracts; b) payment
postponing; c) weighted currency basket clause; d) foreign exchange market intervention. Choose the correct
answer and explain.
Correct answer:
Explanation ______________________________________________________________________________
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12. If the base currency is appreciating, then: a) we will pay more monetary units from the variable currency for
one monetary unit of base currency; b) the exchange rate is decreasing; c) variable currency appreciate, also; d)
we will pay more monetary units from the base currency for one monetary unit of variable currency. Chose the
correct answer and explain.
Correct answer:
Explanation ______________________________________________________________________________
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13. Choose the correct answer regarding the options: a) profit for a put seller is unlimited; b) profit for a put
buyer is unlimited; c) loose for an option buyer is limited to the premium; d) the buyer of a call option has the
obligation to buy the support currency at the maturity. Explain for one of the other choices why is not correct.
Correct answer:
Explanation ______________________________________________________________________________
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14. It is a disadvantage of the floating exchange rate: a) exchange rate risk increase; b) monetary policy
autonomy; c) loss of the monetary policy independence; d) internal interest rate decrease. Explain for one of the
other choices why is not correct.
Correct answer:
Explanation ______________________________________________________________________________
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II. Solve the following problems (each question = 0.4 points; total 2 points):
The following spot exchanges rates are known:
New York London Bucharest
BID ASK BID ASK BID ASK
GBP/USD 1.3124 1.3126 GBP/USD 1.3120 1.3123 EUR/RON 4.7761 4.7809
GBP/EUR 1.1629 1.1635 GBP/EUR 1.1637 1.1642 CAD/RON 3.1902 3.1932
EUR/USD 1.1442 1.1446 EUR/USD 1.1435 1.1443 PLN/RON 1.0784 1.0795
USD/CHF 0.9349 0.9375 USD/CAD 1.3183 1.3191
USD/NO 9.2354 9.2362 EUR/AU 1.6448 1.6469
K D
USD/JPY 101.30 101.36 USD/JPY 101.38 101.43

The following interest rates exist on the money market for 6 months maturity:
Currency Passive interest rate Active interest rate
RON 3.5% 6.25%
PLN 2.5% 3%

1. Identify the spatial arbitrage opportunities

2. What is the amount in AUD that can be obtained by an English company holding 10,000 EUR?

3. Determine the amount that must be paid by a Romanian Company in order to buy forward for 6 months 50,000
Polish zloty (PLN)
4. An American company has 50,000 Swiss francs (CHF) in a bank account. The company needs Japanese yens
(JPY) to import goods from Japan. In order to obtain the needed amount, the company ask its bank to sell a sum
in Swiss francs so as to collect 700,000 Japanese yens, needed for import. Determine the amount in CHF that it
has to sell in order to obtain 700,000 JPY

5. If at moment t0 the EUR/AUD exchange rate on the London FOREX market is 1.649, and at time t1 EUR/AUD
it becomes 1.6180. Which of the following statements is true and which is false:
a. EUR depreciates at 1.88% and European goods imported in Australia are getting cheaper;
b. AUD depreciates by 1.91%, and euro area goods become more expensive;
c. EUR appreciates by 1.88% and goods in Australia are cheaper for an European;
d. AUD appreciates at 1.91% and goods from Australia are more expensive for an European.