Chapter 9

forward foreign exchange transaction

A negotiated OTC agreement to exchange currencies at a fixed date in the future but at an exchange rate specified today is a A. currency swap agreement B. forward foreign exchange transaction C. currency futures contract D. currency options contract E. spot foreign exchange transaction

net foreign assets + net FX bought

Bank's net foreign exposure is equal to A. net foreign assets B. net FX bought C. net foreign assets + net FX bought D. assets - liabilities E. none of the above

$4.0 trillion

Foreign exchange trading in 2010 averaged about _____________ per day. A. $101 million B. $4.0 trillion C. $101 billion D. $1.88 trillion E. $101 trillion

False

New York is the global center of foreign exchange trading with the largest daily volume of currency trading.

buy pounds forward.

A U.S. investor has borrowed pounds, converted them to dollars, and invested the dollars in the United States to take advantage of interest rate differentials. To cover the currency risk, the investor should A. sell pounds forward. B. buy dollars forward. C. buy pounds forward. D. sell pounds spot. E. none of the above

True

A country with lower interest rates than another country is likely to see its currency appreciate if parity holds.

$1.5498

A European investor can earn a 4.75% annual interest rate in Europe or 2.75% per year in the United States. If the spot exchange rate is $1.58 per euro, at what one-year forward rate would an investor be indifferent between the U.S. and Japanese investments? A. $1.5484 B. $1.6108 C. $1.5335 D. $1.5498 E. $1.5977

¥98.56

A Japanese investor can earn a 1% annual interest rate in Japan or about 3.5% per year in the United States. If the spot exchange rate is 101 yen to the dollar, at what one-year forward rate would an investor be indifferent between the U.S. and Japanese investments? A. ¥100.58 B. ¥98.56 C. ¥101.68 D. ¥97.42 E. ¥103.50

11.04%

A Swiss bank converted 1 million Swiss francs to euros to make a euro loan to a customer when the exchange rate was 1.85 francs per euro. The borrower agreed to repay the principle plus 3.75% interest in 1 year. The borrower repaid euros at loan maturity and when the loan was repaid the exchange rate was 1.98 francs per dollar. What was the bank's franc rate of return? A. 7.75% B. 11.04% C. 9.94% D. -2.82% E. 5.71%

sell euros forward.

A U.S. bank borrowed dollars, converted them to euros, and invested in euro-denominated CDs to take advantage of interest rate differentials. To cover the currency risk the investor should A. sell dollars forward. B. sell euros forward. C. buy euros forward. D. sell euros spot. E. none of the above

-3.08%

A U.S. bank converted $1 million to Swiss francs to make a Swiss franc loan to a valued corporate customer when the exchange rate was 1.2 francs per dollar. The borrower agreed to repay the principle plus 5% interest in 1 year. The borrower repaid Swiss francs at loan maturity and when the loan was repaid the exchange rate was 1.3 francs per dollar. What was the bank's dollar rate of return? A. 26.00% B. -2.69% C. 7.14% D. -3.08% E. 5.00%

False

A U.S. bank has made £12 million worth of loans and £10 million worth of deposits in Britain. The bank would benefit from a drop in the value of the pound against the dollar.

£30 million

A U.S. bank has £120 million in loans to corporate customers and has £70 million in deposits it owes to customers with the same maturity. The bank has also sold £20 million pounds forward. The bank's net exposure is A. £210 million B. £30 million C. £70 million D. £170 million E. £190 million

True

A U.S. firm agrees to import textiles from Hong Kong and pay in 90 days. The invoice requires payment in Hong Kong dollars. The U.S. importer could hedge this currency risk by buying the HK dollar forward.

buying pounds forward

A U.S. firm has borrowed £50 million from a British firm. The borrower will need to convert dollars to pounds to repay the loan when it is due. The U.S. firm could hedge the exchange rate risk by A. buying pounds forward. B. selling pounds forward. C. borrowing pounds. D. both B and C would hedge the risk E. both A and C would hedge the risk

both B and C would hedge the risk

A U.S. firm has £50 million in assets in Britain that they need to repatriate in 6 months. They could hedge the exchange rate risk by A. buying pounds forward. B. selling pounds forward. C. borrowing pounds. D. both B and C would hedge the risk E. both A and C would hedge the risk

the country borrowed from abroad more than it loaned, and/or sold off some of its assets.

A current account deficit implies that A. more goods and services are exported than are imported. B. the country borrowed from abroad more than it loaned, and/or sold off some of its assets. C. there is excessive consumption of foreign financial assets. D. the value of the dollar will rise. E. the country is going bankrupt.

True

A drop in value of the dollar hurts U.S. importers and helps U.S. exporters, ceteris paribus.

8.26%

An investor starts with $1 million and converts it to 0.75 million pounds, which is then invested for one year. In a year the investor has 0.7795 million pounds, which she then converts to dollars at an exchange rate of 0.72 pounds per dollar. The U.S. dollar annual rate of return earned was _____. A. 4.97% B. 5.27% C. 6.45% D. 7.69% E. 8.26%

8.26%

An investor starts with €1 million and converts it to £694,500, which is then invested for one year. In a year the investor has £736,170, which she then converts back to euros at an exchange rate of 0.68 pounds per euro. The annual euro rate of return earned was _____. A. 7.55% B. 6.00% C. 7.45% D. 8.13% E. 8.26%

0.4182

At the beginning of the year the exchange rate between the Brazilian Real and the U.S. dollar was 2.2 Reals per dollar. Over the year Brazilian inflation was 12% and U.S. inflation was 4%. If purchasing power parity holds, at year-end the exchange rate should be approximately ________________ dollars per Real. A. 2.3913 B. 0.4895 C. 2.8498 D. 0.4182 E. 0.3440

False

During much of the 1800s, developed nations employed what came to be known as the Bretton Woods international monetary system to manage exchange rates.

positive net exposure

If a firm has more foreign currency assets than liabilities, and no other foreign currency transactions, it has A. positive net exposure B. negative net exposure C. a fully balanced position D. zero net exposure

True

If a foreign currency appreciates, that country's goods and services become relatively more expensive for U.S. buyers.

2% lower

If interest rate parity holds and the annual German nominal interest rate is 3% and the U.S. annual nominal rate is 5% and real interest rates are 2% in both countries, then inflation in Germany is about _______________ than in the United States. A. 1% higher B. 2% higher C. 1% lower D. 4% lower E. 2% lower

False

If the United States has inflation of 3% and Europe has inflation of 5%, the value of the euro should increase, ceteris paribus.

False

If the dollar is initially worth 120 yen and then the exchange rate changes so that the dollar is now worth 115 yen, the value of the yen has depreciated.

False

If the euro per yen ratio falls, the value of the yen has risen.

True

If you can convert 150 Swiss francs to $90, the exchange rate is 1.67 francs per dollar.

False

In 1971, the Bretton Woods Agreement established that, for the first time, currency values would be fixed against one another within narrow bands.

True

In 1973, the Smithsonian Agreement II eliminated fixed exchange rates for the major economies.

$2.4 trillion; $2.2 trillion; deficit

In 2009, the U.S. imported goods and services worth about _____________ and exported about _________ leading to a current account ____________. A. $2.4 trillion; $2.2 trillion; deficit B. $2.2 trillion; $2.4 trillion; surplus C. $2.4 trillion; $2.2 trillion; surplus D. $2.2 trillion; $2.4 trillion; deficit E. $2.0 trillion; $2.0 trillion; balance

current account

The ________________ measures the net flows of imports and exports of goods, services, income payments, and unilateral transfers. A. current account B. capital account C. change in official reserves D. statistical discrepancy E. basic balance account

Smithsonian Agreement II

The agreement that ended the era of fixed exchange rates for the major economies was called the A. Louvre Accord B. Bretton Woods Agreement C. Smithsonian Agreement I D. Smithsonian Agreement II E. Plaza Accord

Law of one price

The concept underlying purchasing power parity is the A. Fisher effect B. Bretton Woods Agreement C. Law of one price D. Big Mac Index E. Balance of payments concept

False

The dollar's value increased when the Fed cut interest rates in late 2007.

the United States must rely on foreigners to be willing to invest in the United States.

The large U.S. current account deficit implies that A. U.S. interest rates are too high. B. the value of the dollar is too weak. C. dollar foreign currency reserves at Asian central banks are too low. D. the presidential administration desires to improve growth of overseas economies. E. the United States must rely on foreigners to be willing to invest in the United States.

London

The largest center for trading in foreign exchange is A. New York B. London C. Tokyo D. Hong Kong E. Geneva

increased; increased

The levels of foreign currency assets and liabilities at banks have ___________ in recent years and the level of foreign currency trading has ____________. A. increased; increased B. decreased; decreased C. increased; decreased D. decreased; increased E. decreased; stayed the same

False

The ongoing accumulation of foreign currency reserves by foreign monetary authorities contributed to the dollar's drop in 2006.

0.3384

The spot rate for the Argentine peso is $0.3600 per peso. Over the year inflation in Argentina is 10% and U.S. inflation is 4%. If purchasing power parity holds, at year-end the exchange rate should be approximately ______________ dollars per Real. A. 0.2987 B. 0.3614 C. 0.2875 D. 0.3384 E. 0.3015

I and II only

Which of the following are likely to lead to an appreciation of the U.S. dollar (ceteris paribus)? I. Higher real U.S. interest rates II. Lower U.S. inflation III. Higher nominal U.S. interest rates A. II and III only B. I and III only C. I and II only D. II only E. I, II, and III

II and III only

Which of the following conditions may lead to a decline in the value of a country's currency? I. Low interest rates II. High inflation III. Large current account deficit A. I only B. I and II only C. II and III only D. II only E. III only

5.92%

You can buy or sell the yen spot at ¥102 to the dollar. You can buy or sell the yen one-year forward at ¥104 to the dollar. If U.S. annual interest rates are 4%, what must be the approximate one-year Japanese interest rate if interest rate parity holds? A. 5.92% B. 3.20% C. 2.75% D. 4.73% E. 6.80%

3.48%

You can buy or sell the £ spot at $1.98 to the pound. You can buy or sell the pound one-year forward at $2.01 to the pound. If U.S. annual interest rates are 5%, what must be the approximate one-year British interest rate if interest rate parity holds? A. 4.00% B. 5.25% C. 2.75% D. 3.48% E. 5.65%