Exporter expects to receive a payment

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Review Question

1. A Canadian exporter expects to receive a payment of 1000 USD after two weeks. The exporter has purchased an option to sell 1000 USD for CAD after two weeks at an exchange rate of 1 USD = 1.25 CAD. The exporter should exercise this option if after 2 weeks, the USD-CAD exchange rate becomes.

A. USD = 1.3 CAD.

B. USD = 1.2 CAD.

C. USD = 1.4 CAD.

D. USD = 1.5 CAD.

2. Suppose the price of a Big Mac in Denmark is 25 krone. The exchange rate between the krone and USD is 1 USD = 5 krone. Assume that the price of a Big Mac in the U.S. is 4 USD. Then, using the Big Mac index, the krone is.

A. 4 percent.

B. 0 percent.

C. 3 percent.

D. 2 percent. 

3. Suppose the price of a Big Mac in Denmark is 25 krone. The exchange rate between the krone and USD is 1 USD = 5 krone. Assume that the price of a Big Mac in the U.S. is 4 USD. Then, using the Big Mac index, the krone is.

A. over-valued by 5 percent with respect to USD.

B. over-valued by 50 percent with respect to USD.

C. under-valued by 25 percent with respect to USD.

D. over-valued by 25 percent with respect to USD.

4. Denmark pegs the exchange rate of its currency to the euro. In the absence of capital controls, a 2 percent decrease in the short-run eurozone interest rate will.

A. reduce the Danish interest rate by 2 percent.

B. reduce the Danish interest rate by more than 2 percent.

C. raise the Danish interest rate by 2 percent.

D. reduce the Danish interest rate by less than 2 percent.

Reference no: EM131752238

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