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Free CFA-Level-I Exam Braindumps (page: 305)

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An appreciation of the U.S. dollar

  1. is the same thing as an increase in the domestic price level.
  2. increases the purchasing power of the U.S. dollar in foreign markets for goods and services.
  3. decreases the purchasing power of the U.S. dollar in foreign markets for goods and services.
  4. is the same thing as a decrease in the consumer price level.

Answer(s): B

Explanation:

An appreciation of the U.S. dollar implies that it takes less U.S. dollars to purchase one unit of foreign currency.
Thus, a U.S. dollar goes further than it did before. This is an increase in the purchasing power of the U.S.
dollar.



Relative to the French franc, the dollar has over the period 1973 to 1993:

  1. fallen from a high of 25.5 francs to the dollar in 1973 to a low of 3.4 francs to the dollar in 1985 and risen again to 12.6 francs to the dollar in 1993.
  2. none of these answers.
  3. fallen from a high of 22.5 francs to the dollar in 1973 to a low of 11.1 francs to the dollar in 1985 to 17.6 francs to the dollar in 1993.
  4. risen from 22.5 francs to the dollar in 1973 to 35.2 francs to the dollar in 1985 to 40.5 francs to the dollar in 1993.
  5. has remained relatively stable around 15 francs to the dollar.

Answer(s): C

Explanation:

The U.S. dollar has moved greatly over this period relative to the French franc. The dollar fell from a high of 22.5 francs to the dollar in 1973 to a low of 11.1 francs to the dollar in 1985 and then rose again to 17.6 francs to the dollar in 1993.



Which of the following is/ are true ?

  1. All Central bank transactions are excluded from the BOP account.
    II. All cash flows associated with foreign investments belong to the Capital account.
    III. Repatriation of domestic currency to a foreign country by foreign nationals living in the country are treated as part of the Current account.
  2. I & II
  3. III only
  4. II only
  5. I only

Answer(s): B

Explanation:

All Central Bank transactions are excluded from the Current and Capital accounts and charged to the Official Reserve account. However, since the Reserve account is part of the BOP account, I is false.
Direct foreign investments are Capital account items. However, income associated with these is treated as part of the Current account. Hence, II is false.
III is a direct outflow of domestic currency and treated as a debit entry on the Current account.



A ________, which is between a bank and a customer (or another bank), specifies delivery at a fixed future date, of a fixed amount of one currency against dollar payment.

  1. foreign exchange contract
  2. forward contract
  3. futures contract
  4. currency arbitrage
  5. cross rate

Answer(s): B

Explanation:

A U.S. firm buys goods from Germany with payment of DM 500,000 due in 90 days. The current price of the DM is $0.4490, yet may rise against the dollar which increases the dollar cost of the goods. The U.S. firm can protect itself against this exchange risk by entering into a 90-day forward contract with a bank at a price of $0.4511. Thus, according to the forward contract, the bank will give the U.S. firm DM 500,000 in 90 days to pay for the goods and the U.S. firm will give the bank $225,550 million (DM 500,000 x 0.4511). If the spot rate in 90 days is less than $0.4511, the U.S. firm will experience a loss on the forward contract because it is buying marks for more than the current rate. On the other hand, if the spot rate is higher than $0.4511, the importer will implicitly profit.






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