International Finance Test 2

A US firm has a €250,000 receivable with payment scheduled for September of 2023. The firm can hedge its FX risk by entering a _____ position on _____ September euro futures contract(s). A. short; two B. short; four C. long; four D. long; two

A

A US firm has an accounts payable of €225,000 that is due to a German firm in 6 months. The current spot rate is $1.18/€, the 6-month forward rate is $1.19/€, the 6-month US interest rate is 1.5%, and the 6-month German interest rate is 2.5%. In order to set up a money market hedge, the US firm should A. buy €219,512 at the spot rate. B. borrow €219,512 from a German bank. C. deposit $265,500 in a US money market account. D. take a long forward position in the euro.

A

According to the random walk approach, which of the following matters most in forecasting an exchange rate? A. today's spot rate B. the expected inflation rate C. the interest rate differential D. historical patterns of changes in the spot rate

A

European options A. can only be exercised at maturity. B. can only be traded through a Eurozone dealer. C. tend to be worth more than American options, holding other things constant. D. do not require the buyer to pay a premium. E. All of the above.

A

Refer to Problem #9 at the end of Chapter 6. Given the information provided, a euro-based investor can realize a profit of ______ by conducting covered interest arbitrage. A. €68,134 B. €54,000 C. €72,267 D. €12,667

A

Suppose that a trader observes the rates provided in the following table. Based on these rates, IRP is ______ and covered interest arbitrage is ______. (Hint: Use the formal equation for IRP and round your calculations to 3 decimal places.) S$/€1.1655 F6,$/€1.1690 6-month i$ 1.8% 6-month i€ 1.5% A. holding; not possible B. holding; possible C. not holding; not possible D. not holding; possible

A

Suppose that the annual interest rate in Australia is 3%, and the annual interest rate in the U.S. is 2.5%. In this case, you would expect the Australian dollar to be trading at a 12-month forward _____ of about _____ percent. (HINT: Use the approximated equation for IRP.) A. discount; 0.5 B. discount; 1.2 C. premium; 0.5 D. premium; 1.2

A

Suppose that the expected annual inflation rate in Country A is 1.3% and the expected annual inflation rate is 2.5% in Country B. Relative purchasing power parity predicts that Country A's currency will _____ by about _____ over the next year. (Hint: Use the equation that provides an approximation of relative PPP.) A. appreciate; 1.2% B. depreciate; 3.8% C. depreciate; 1.2% D. appreciate; 3.8%

A

Suppose the spot exchange rate is €1.00 = $1.60. Next year's expected inflation rate is 2% in the US and 3% in the euro zone. What is the one-year forward rate that should prevail if relative PPP is holding? (Hint: Rearrange the terms in the formal equation for relative PPP.) A. €1.00 = $1.5845 B. €1.00 = $1.6320 C. €1.00 = $1.6157 D. €1.00 = $1.5686

A

Suppose you observe an exchange rate of S($/SFr) = 0.85 (i.e., SFr 1 = $.85). The one-year forward rate is F1($/SFr) = 0.935 (i.e., SFr 1 = $.935). The annual interest rate is 5% in the U.S and 2% in Switzerland. A dollar-based investor can profit by borrowing ______, exchanging them for _____, investing in _____, and entering a one-year forward contract to _____. A. dollars; Swiss francs; Switzerland; sell Swiss francs for dollars B. dollars; Swiss francs; Switzerland; buy Swiss francs with dollars C. Swiss francs; dollars; the US; sell dollars for Swiss francs D. Swiss francs; dollars; the US; buy dollars with Swiss francs

A

According to the random walk approach, which of the following matters most in forecasting an exchange rate? A. the historical pattern of changes in the spot rate B. today's spot rate C. the expected inflation rate D. the interest rate differential

B

Assume today's settlement price on a euro futures contract is $1.1434/€. You have a short position on one contract for €125,000. Your performance bond account currently has a balance of $2,500. The next three days' settlement prices are $1.1420, $1.1418, and $1.1440. Thus, the balance in your performance bond account after the third day equals A. $2,575 B. $2,425 C. -$75.00 D. -$150

B

In the real world, interest rate parity (IRP) _____, so covered interest arbitrage is ______. A. never holds; uncommon B. tends to hold; uncommon C. rarely holds; common D. always holds; common

B

Refer to Exhibits 7.3 and 7.4 in your textbook; the exhibits provide information for a September 2019 euro futures contract. Suppose that a trader took a long position on this contract on April 3, 2019. The trader will earn a profit if the spot price at maturity (Sept 18, 2019) is A. $1.13955/€ B. $1.143259/€ C. $1.13910/€

B

Refer to Problem #12 at the end of Chapter 6. As astute traders conduct arbitrage, A. the interest rate in the US will fall. B. the US dollar will depreciate in the spot market. C. the interest rate in Switzerland will rise. D. the US dollar will depreciate in the forward market. E. All of the above.

B

Suppose that a basket of goods costs €500 in Spain, and the identical basket of goods costs $625 in the U.S. If absolute purchasing power parity (PPP) holds the _____ exchange rate will equal _____ in American terms. A. one-year forward; 1.25 B. spot; 1.25 C. one-year forward; .80 D. spot; .80

B

A US firm is purchasing inventory from a company in Germany. Payment is due in euros in one year. The US firm wishes to fix the dollar value of the cash outflow and eliminate exchange rate risk. In this case, the firm should A. borrow $, exchange them for euros, and invest the euros in Germany. B. establish a long forward contract on the euro. C. Either of the above strategies will meet the firm's goals. D. Neither of the above strategies will meet the firm's goals.

C

Among the techniques used to forecast exchange rates, the _____ approach relies heavily on estimation of a structural model and econometrics. A. random walk B. technical C. fundamental D. behavioral

C

FX option contracts are traded A. only on organized exchanges. B. only over-the-counter through bank dealers and brokers. C. on both organized exchanges and over-the-counter.

C

Refer to Problem #12 at the end of Chapter 6. Based on the information provided, IRP is not holding because (1 + _____) is less than ______. (HINTS: 1. Note that the 6-month interest rates are "per year." 2. Use the formal equation for IRP, but be careful! The exchanges rates are in European terms, so think about which terms go in the numerator and denominator.) A. .02; 1.025 B. .005; 1.0125 C. .0125; 1.0209 D. .01; 1.0215

C

The absolute version of purchasing power parity (PPP) states that _______ will be equal across locations, given the current spot rate. A. nominal interest rate B. forward premium or discount for a non-dollar currency C. the price of a standard commodity basket D. annual rate of inflation

C

Consider a call option written on €100,000. The exercise price is $1.36/€1.00 and the option premium is $0.02 per euro. At expiration the buyer of this call option will break even if the spot rate equals: A. $1.00/€1.00 B. $1.00/€.7563 C. $1.34/€1.00 D. $1.38/€1.00

D

Suppose that the spot exchange rate for Japanese yen is ¥122/$ and that the one-year forward exchange rate for Japanese yen is ¥130/$. The one-year interest rate in the United States is 5%. Assuming IRP holds, what is the interest rate in Japan? (HINT: Use the formal equation for IRP.) A. 6.56% B. 3.28% C. 1.67% D. 11.89%

D

Consider a 3-month option on €150,000 with an exercise price of $1.07/€ and a premium of $.03 per pound. From the buyer's perspective, a put option will be in-the-money at maturity if the spot rate in 3 months is _____. A. $1.06/€ B. $1.05/€ C. $1.04/€ D. $1.03/€ E. All of the above.

E

Empirical tests indicate that absolute purchasing power parity frequently does not hold because of factors that impede arbitrage, including: A. tariffs and quotas. B. differences in the quality of goods. C. nontradables, such as personal services. D. transportation costs. E. All of the above.

E

Which of the following statements provides accurate information about futures contracts? A. The size of the contract is standardized. B. Contract delivery dates are standardized. C. Delivery of the underlying asset is not typically made. D. Contracts are traded on organized exchanges such as the Chicago Mercantile Exchange. E. All of the above.

E

If the expected inflation rate in Country A is higher than in Country B, relative PPP predicts that Country A's currency will be trading at a forward discount (relative to Country B's currency). T/F

T

Suppose that a British firm has a $500,000 payable due in one year. If IRP is holding, the £-value of the payable using a forward hedge will be equal to the £-value of the payable using a money market hedge. T/F

T