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

SUBJECT 5 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. A currency having official convertibility: a) is used for clearing of the international transaction; b) is having
no restrictions regarding the current and capital transactions; c) is recognized only by the issuing country; d)
according to the IMF decision from 1978. Explain for one of the other choices why is not correct.
Correct answer:
Explanation ______________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

2. Purchase rate parity: a) is based on the law on one price; b) works on short term; c) has an covered and an
uncovered form; d) is used to determine forward exchange rate. Choose the correct answer and explain.
Correct answer:
Explanation ______________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

3. Choose correct answer regarding Harrod-Balassa-Samuelson Effect and explain: a) real exchange rate is
influenced by the prices of the tradable goods; b) non-tradable goods prices are internationally determined; c)
suppose lower productivity in developed countries compared with the developing countries; d) represents the
tendency of the countries with a high productivity in the tradable goods sector comparing to the non-tradable
goods sector to have higher prices.
Correct answer:
Explanation ______________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
4. If the variable currency is appreciating, then: a) the base currency is more expensive; b) we will pay more
monetary units from the base currency for one monetary unit of variable currency; c) base currency appreciate,
also; d) the exchange rate increase.
Correct answer:
Explanation ______________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

5. Choose the correct answer regarding exchange rate crisis: a) is corelated also with high political and
economic costs; b) is associated with low levels of national currency depreciation; c) is a characteristic of
floating exchange rates regimes; d) the empirical studies demonstrates that the depreciation in developed
countries is higer versus the depreciation in developing countries. Explain why the others answers are wrong
Correct answer:
Explanation ______________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

6. The actual form of convertibility is: a) gold – currency; b) gold – bullion; c) currency to currency; d)gold –
payment instruments. Choose the correct answer and explain.
Correct answer:
Explanation ______________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

7. The criteria for adopting euro are: a) inflation: not more than 2 percentage points above the rate of the three
best performing Member States; b) interest rate: not more than 2 percentage points above the rate of the three
best performing Member States in terms of price stability; c) government deficit: lower than 3% from GDP; d)
public debt: lower than 60% from GDP. Choose the wrong answer and explain.
Correct answer:
Explanation ______________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

8. It is a disadvantage of the floating exchange rate: a) monetary policy autonomy; b) exchange rate risk
decrease; c) internal interest rate decrease; d) currency speculations. Explain for one of the other choices why is
not correct.
Correct answer:
Explanation ______________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

9. 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 ______________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

10. The interest rate parity: a) the covered interest rate parity is the form that works on long term; b) suppose
that the arbitrage opportunities exists on the market; c) is determining the forward exchange rate based on the
results obtained through the investment in two currencies; d) the expected exchange rate tends to the spot
exchange rate. Choose the correct answer and explain
Correct answer:
Explanation ______________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

11. If the exchange rate at the maturity is higher than the strike price, the buyer of a call option: a) sell at the
strike price; b) earn the premium; c) has a maximum profit; d) pay the premium. Choose the correct answer and
explain the choice.
Correct answer:
Explanation ______________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

12. International liquidity: a) represents all the assets that can be used at a certain moment in order to settle the
national debts; b) do not includes the gold reserve which have only a historical significance; c) shrinks to its
main component: international reserve assets reflected into balance of payments and managed by central bank;
d) can be measured only by IMF. Explain why one of other answers is wrong.
Correct answer:
Explanation ______________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

13. Current account of the balance of payments: a) includes capital balance; b) includes current transfers; c)
books on debit receivables from external rendered services; d) includes reserve assets. Choose the correct
answer and explain
Correct answer:
Explanation ______________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

14. 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 ______________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

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 1.2114 1.2120 GBP/USD 1.2122 1.2126 EUR/RON 4.9143 4.9204
GBP/EUR 1.1633 1.1642 GBP/EUR 1.1629 1.1635 CAD/RON 3.2902 3.3132
EUR/USD 1.0433 1.0436 EUR/USD 1.1425 1.1430 PLN/RON 1.0884 1.0989
USD/CHF 0.9349 0.9375 USD/CAD 1.3183 1.3191
USD/NOK 9.1344 9.1352 EUR/AUD 1.6448 1.6469
USD/JPY 101.50 101.82 USD/JPY 101.28 101.33

The following interest rates exist on the money market for 6 months maturity:
Currency Passive interest rate Active interest rate
RON 2.5% 5%
PLN 3% 6.25%

1. Determine the forward ask exchange rate for PLN/RON?

2. Determine the triangular arbitrage opportunities for New York market
3. Determine the amount in AUD that will be obtained for 10,000 EUR
4. If the actual exchange rate on London market is GBP/EUR 1.1635 and after 3 months the exchange rate becomes
1.1627, determine if EUR appreciate or depreciate (and the degree)
5. An American company has 50,000 Norwegian krona (NOK) 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 NOK so as to collect 90,000 JPY, needed for import. Determine the amount in NOK that it has to sell in order
to obtain 90,000 JPY