1. Which of the following theories suggests the percentage change in spot exchange rate of a currency should be equal to the interest rate differential between two countries?
a. absolute form of PPP
b. relative form of PPP
c. international Fisher effect (IFE)
d. interest rate parity (IRP)
2. If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher effect (IFE) to hold:
a. the value of the euro would often appreciate against the dollar.
b. the value of the euro would often depreciate against the dollar.
c. the value of the euro would remain constant most of the time.
d. the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation.
3. Which of the following theories suggests that the percentage difference between the forward rate and the spot rate depends on the interest rate differential between two countries?
a. purchasing power parity (PPP)
b. triangular arbitrage
c. international Fisher effect (IFE)
d. interest rate parity (IRP)
4. If the international Fisher effect (IFE) did not hold based on historical data, then this suggests that:
a. some corporations with excess cash can lock in a guaranteed higher return on future foreign short-term investments.
b. some corporations with excess cash could have generated profits on average from covered interest arbitrage.
c. some corporations with excess cash could have generated higher profits on average from foreign short-term investments than from domestic short-term investments.
d. most corporations that consistently invest in foreign short-term investments would have generated the same profits (on average) as from domestic short-term investments.