Exercises
1.Single-choice questions
(1)To pave the way for the European Monetary Union, the member countries of the European Monetary System agreed to achieve a convergence of their economies.Which of the following is NOT a condition of convergence?
a.Keeping the ratio of government budget deficits to GDP below 3 percent.
b.Keeping gross public debts below 60 percent of GDP.
c.Achieving a high degree of price stability.
d.Maintaining its currency at a fixed exchange rate to the ERM.
(2)The European Monetary System (EMS)has the following chief objectives:____________.
a.to establish a “zone of monetary stability” in Europe
b.to coordinate exchange rate policies vis-à-vis the non-EMS currencies
c.to pave the way for the eventual European monetary union
d.All of the above.
(3)The Exchange Rate Mechanism (ERM)is____________.
a.the procedure by which ERM member countries collectively manage their exchange rates
b.based on a “parity-grid” system, which is a system of par values among ERM countries
c.a and b
d.None of the above.
(4)The Maastricht Treaty____________.
a.irrevocably fixed exchange rates among the member currencies
b.commits the members of the European Union to political union as well as monetary union
c.was signed and subsequently ratified by the 12 member states
d.All of the above.
(5)The single European currency, the euro, was adopted by 11 member nations on January 1 of what year?
a.1984 b.1991 c.1999 d.2001
(6)Benefits from adopting a common European currency include____________.
a.reduced transaction costs
b.elimination of exchange rate risk
c.increased price transparency will promote Europe-wide competition
d.All of the above.
(7)Monetary policy for the euro-12 countries is now conducted by____________.
a.the Federal Reserve b.the Bundesbank
c.the European Central Bank d.None of the above.
(8)Following the introduction of the euro, the national central banks of the euro-12 nations____________.
a.disbanded
b.formed the ESCB, which is analogous to the Federal Reserve System in the United States
c.continue to perform important functions in their jurisdictions
d.b and c are correct
(9)The main cost of monetary union is____________.
a.the loss of national monetary and exchange rate policy independence
b.increased exchange rate uncertainty
c.lessened political integration
d.None of the above.
(10)The euro zone remarkably comparable to the United States in terms of____________.
a.Population size b.GDP
c.International trade share d.All of the above.
(11)According to the theory of optimum currency areas,____________.
a.the relevant criterion for identifying and designing a common currency zone is the degree of factor (i.e., capital and labor)mobility within the zone
b.exchange rates should reflect the degree to which workers are willing to move to get a better job
c.exchange rates are determined by portfolio managers seeking the highest return
d.None of the above.
(12)The most widely used futures contract for hedging short-term US dollar interest rate risk is____________.
a.The Eurodollar contract b.The Euroyen contract
c.The EURIBOR contract d.None of the above.
(13)Consider the position of a treasurer of a MNC, who has $20,000,000 that his firm will not need for the next 90 days,____________.
a.he could borrow the $20,000,000 in the money market
b.he could take a long position in the Eurodollar futures contract
c.he could take a short position in the Eurodollar futures contract
d.None of the above.
(14)A decrease in the implied three-month LIBOR yield causes Eurodollar futures price________.
a.to increase
b.to decrease
c.there is no direct or indirect relationship
d.None of the above.
2.Essay questions
(1)What is Eurocurrency?
(2)What is the characteristics of the Eurocurrency interest rates?
(3)What is Eurocurrency market?
(4)What is the classification of international financial market?