Suppose That the One-Year Forward Price of Euros in Terms

question 8

Multiple Choice

Suppose that the one-year forward price of euros in terms of dollars is equal to $1.113 per euro. Further, assume that the spot exchange rate is $1.05 per euro, and the interest rate on dollar deposits is 10 percent and on euro it is 4 percent. Under these assumptions

• A) interest parity does not hold.
• B) interest parity does hold.
• C) it is hard to tell whether interest parity does or does not hold.
• D) interest parity fluctuates.
• E) Not enough information is given to answer the question.

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Definitions:

Variable Component

Part of a cost or expense that changes in proportion with the level of activity or volume of output.

Fixed Component

A portion of a cost that does not change with the level of production or sales over the short term.

Overapplied

A scenario in which the overhead costs allocated are higher than the overhead costs that were actually incurred.

Standard Cost System

An accounting method that uses predetermined costs for valuing inventory and recognizes variances between these costs and actual costs.