Foreign Exchange Market and Skill

Fundamentals of Multinational Finance, 3e (Moffett)
Chapter 6
International Parity Conditions

6.1
Multiple Choice and True/False Questions

1)
If an identical product can be sold in two different markets, and no restrictions exist on the sale or transportation costs, the product 's price should be the same in both markets. This is know as A) relative purchasing power parity. B) interest rate parity. C) the law of one price. D) equilibrium. Answer:
C
Topic:
The Law of One Price Skill:
Recognition

2)
________ states that the spot exchange rate is determined by the relative prices of similar baskets of goods. A)
Absolute purchasing power parity B)
Relative purchasing power parity C)
Interest rate parity D)
The Fisher Effect Answer:
A
Topic:
PPP
Skill:
Recognition

3)
The Economist publishes annually the "Big Mac Index" by which they compare the prices of the McDonald 's Corporation 's Big Mac hamburger around the world. The index estimates the exchange rates for currencies based on the assumption that the burgers in question are the same across the world and therefore, the price should be the same. If a Big Mac costs $2.54 in the United States and 294 yen in Japan, what is the estimated exchange rate of yen per dollar as hypothesized by the Hamburger index? A)
$0.0086/¥
B)
124¥/$
C)
$0.0081/¥
D)
115.75¥/$
Answer:
D
Topic:
PPP
Skill:
Analytical

4)
If the current exchange rate is 113 Japanese yen per U.S. dollar, the price of a Big Mac hamburger in the United States is $3.41, and the price of a Big Mac hamburger in Japan is 280 yen, then other things equal, the Big Mac hamburger in Japan is ________. A) correctly priced B) under priced C) over priced D) not enough information to determine if the price