IBUS 302: International Finance, Exam 2
EXAMPLE
There are 150 possible points, and the exam is worth 15% of your course
grade. You have one hour and fifteen minutes. You are only permitted to
use a calculator. To receive credit, you must show all of your work. In
yours answers, provide the correct number of decimal points for
exchange rates and two decimal points for percentages, e.g., 1.34%.
Short Answers (50 points)
NAME: _____________________________
1. How might transportation costs affect PPP? (5 points)
2. A Big Mac costs $3.20 in the US and £3.20 in the UK. What does that say
about the validity of absolute purchasing power parity? (5 points)
3. A Big Mac costs $3.20 in the US and £3.20 in the UK. What does that say
about the validity of relative purchasing power parity? (5 points)
4. What are two differences between futures and forward contracts? (5
points)
5. What is one reason that there may be deviations from IRP? Briefly
explain why this causes the deviation. (5 points)
6. What is one reason that there may be deviations from PPP? Briefly
explain why this causes the deviation. (5 points)
7. What happens to the value of a call option when the volatility of the
underlying security goes up? Explain briefly. (5 points)
8. If a contract says you will receive $1,000 in five years, is that a nominal
or real value? Explain briefly. (5 points)
9. What is translation exposure? (5 points)
10. If the return on treasury securities were increasing, would you expect
the dollar (on average) to be appreciating or depreciating? Explain
briefly. (5 points)
3/23/2016
IBUS 302: International Finance, Exam 2
2 (of 3)
Calculations (50 Points) Remember to show all calculations.
Use the following data for all parity calculations:
S($/£) = 1.5677
P$ = 90
i$ = 6%
$ = 5%
F12($/£) = 1.4966
P £ = 80
i£= 7%
 £ = 8%
11. Is covered interest arbitrage possible, i.e., is interest rate parity
violated? If it is, what is the arbitrage profit and how would you
capture that profit? (10 points)
Arbitrage:
Yes
Arbitrage Profit:
No
(circle one)
__________
Arbitrage Strategy: _______________________________________________
12. Find the spot rate (SPPP) predicted by absolute purchasing power
parity. Is the data consistent with absolute purchasing power parity?
Briefly explain your reasoning. (10 points)
SPPP:
__________
Consistent: Yes
No
(circle one)
Reasoning: ___________________________________________________
13. Find the forward rate (FPPP) predicted by relative purchasing power
parity. Is the data consistent with relative purchasing power parity?
Briefly explain your reasoning. (15 points)
FPPP:
__________
Consistent: Yes
No
(circle one)
Reasoning: ___________________________________________________
14. Find the real exchange rate (q) and briefly describe what this value
says about changes in international competitiveness between US
and UK firms. (15 points)
q:
__________
Effect on International Competition: __________________________
3/23/2016
IBUS 302: International Finance, Exam 2
3 (of 3)
15. You hold a forward contract to buy 100,000 euros in three month at
1.4455. What is your loss or gain if the spot rate in three months has
the following values: (10 points)
S3 = 1.4877, Gain/Loss from Contract = ___________________________
S3 = 1.4455, Gain/Loss from Contract = ___________________________
S3 = 1.4178, Gain/Loss from Contract = ___________________________