447 exam 2
Assume that the U.S. one-year interest rate is 3 percent and the one-year interest rate on Australian dollars is 6 percent. The U.S. expected annual inflation is 5 percent, while the Australian inflation is expected to be 7 percent. You have $100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of an Australian dollar is $0.689. What will be the yield on your investment if you invest in the Australian market? a. 4 percent b. 3 percent c. 2 percent d. 6 percent
a
When a currency call option is classified as "in the money," this indicates that a. the spot rate of the currency is greater than the exercise price of the option. b. the buyer of the option would generate a profit; that is, the exercise price would exceed the sum of the spot rate and the premium paid. c. the spot rate of the currency is less than the exercise price of the option. d. the buyer of the option would generate a profit; that is, the spot rate would exceed the sum of the exercise price and the premium paid.
a
When the current exchange rate equals the exercise price, both a call and a put option with that exercise price will be at the money. a. True b. False
a
Which of the following is not true regarding covered interest arbitrage? a. Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country. b. Covered interest arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount. c. If covered interest arbitrage is possible, you can guarantee a return on your funds that exceeds the returns you could achieve domestically. d. Covered interest arbitrage involves investing in a foreign country and covering against exchange rate risk. e. All of these choices are true regarding covered interest arbitrage.
a
Which of the following is not true regarding options? a. The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised. b. The buyer of a put option has the right to sell the currency at the strike price. c. The writer of a call option has the obligation to sell the currency to the buyer if the option if exercised. d. The buyer of a call option has the right to buy the currency at the strike price.
a
A European option can be exercised at any time prior to maturity, while an American option can only be exercised at maturity. a. True b. False
b
Arbitrage can be defined as capitalizing on a discrepancy in quoted prices that does not involve risk but involves an investment of funds. a. True b. False
b
Arbitrage involves a. Risk. b. Capitalizing on a discrepancy in quoted prices. c. An investment of funds tied up for a length of time. d. All of these choices are correct.
b
Assume that a regression of exchange rate changes on the expected exchange rate changes according to purchasing power parity (PPP) produced a coefficient of 2. This strongly indicates that PPP holds. a. True b. False
b
Assume that the British pound (£) futures price for September is $1.60. Given that 62,500 units are in a British pound futures contract, the seller of British pound futures will receive $________ on the delivery date. a. 39,062.50 b. 100,000 c. 48,000 d. 87,062.50
b
Assume that the interest rate in the home country of Currency X is much lower than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X a. should exhibit a discount. b. should exhibit a premium. c. should be zero d. the information provided is not sufficient to select any answer.
b
Because of interest rate parity, a foreign currency's forward rate will normally not move in tandem with the spot rate. a. True b. False
b
Covered interest arbitrage involves capitalizing on exchange rates between locations. a. True b. False
b
For locational arbitrage to be possible, one bank's ask rate must be higher than another bank's bid rate for a currency. a. True b. False
b
If interest rate parity exists, then the rate of return achieved from covered interest arbitrage should be equal to the interest rate available in the foreign country. a. True b. False
b
If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible. a. True b. False
b
If the spot rate of the British pound is $1.50, and the one-year forward rate has a discount of 3 percent, the one-year forward rate is $________. a. 1.55 b. 1.46 c. 1.50 d. 1.47 e. None of these choices are correct.
b
National Bank quotes the following for the British pound and the New Zealand dollar: bid price ask price value of pound in $ $1.61 $1.62 value of NZ$ in $ $0.55 $0.56 value of pound in NZ$ NZ$2.95 NZ$2.96 Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy? a. $197.53 b. $15.43 c. $111.80 d. $77.64
b
PPP theory cannot be tested for countries on which inflation information is available. a. True b. False
b
Purchasing power parity (PPP) focuses on the relationship between nominal interest rates and exchange rates between two countries. a. True b. False
b
The Fisher effect states that real risk-free interest rates contain a nominal rate of return and anticipated inflation. a. True b. False
b
The absolute form of purchasing power parity (PPP) states that the rate of change in the prices of products should be similar (but not identical) when measured in a common currency. a. True b. False
b
The break-even point for a put option buyer occurs when the revenue from selling the currency in the spot market is equal to the exercise price and the premium paid. a. True b. False
b
The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound: Regression results indicate that a0 = 0 and a1 = 0.4. Therefore a. purchasing power parity holds. b. purchasing power parity overestimated the exchange rate change during the period under examination. c. purchasing power parity will overestimate the exchange rate change of the British pound in the future. d. purchasing power parity underestimated the exchange rate change during the period under examination.
b
The interest rate in South Africa is 8%. The interest rate in the U.S. is 5%. The South African forward rate should exhibit a premium of about 3%. a. True b. False
b
The lower the variability of a currency, the ____ will be the premium of a call option on this currency, and the ____ will be the premium of a put option on this currency, other things being equal. a. lower; greater b. lower; lower c. greater; greater d. greater; lower
b
To hedge payables in a foreign currency, corporations would sell futures contracts; to hedge receivables in a foreign currency, corporations would buy futures contracts. a. True b. False
b
Triangular arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount. a. True b. False
b
When the futures price is below the forward rate, astute investors may attempt to simultaneously ________ a currency forward and ________ futures in that currency. a. Sell; sell b. Sell; buy c. Buy; buy d. Buy; sell
b
When you own ____, there is an obligation on your part; however, when you own ____, there is no obligation on your part. a. forward contracts; futures contracts b. futures contracts; call options c. call options; put options d. call options; forward contracts
b
Which of the following is not mentioned in the text as a form of international arbitrage? a. Triangular arbitrage b. Transactional arbitrage c. Locational arbitrage d. Covered interest arbitrage e. All of these choices are mentioned in the text as forms of international arbitrage.
b
Which of the following is not true regarding IRP, PPP, and the IFE? a. PPP suggests that a currency's spot rate will change according to inflation differentials. b. IRP suggests that a currency's spot rate will change according to interest rate differentials. c. The IFE suggests that a currency's spot rate will change according to interest rate differentials. d. All of these choices are true.
b
Which of the following is the least likely strategy for a U.S. firm that will be purchasing Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)? a. Purchase a call option on francs. b. Sell a futures contract on francs. c. Obtain a forward contract to purchase francs forward. d. All of the above are appropriate strategies for the scenario described.
b
1) You have $100,000 to invest 2) The current ask quote for Australian dollars (A$) in the spot market is $0.71 3) The current bid quote for Australian dollars (A$) in the spot market is $0.70 4) The one-year forward rate (ask) for A$ is $0.71 5) The one year forward rate (bid) for A$ is $0.70 6) The one-year U.S. interest rate is 7% 7) The one-year Australian interest rate is 9%. If you conduct covered interest arbitrage, the return you will realize after one year is %. a. 5.35 b. 5.49 c. 7.46 d. 10.56 e. None of these choices are correct.
c
A U.S.-based MNC knows that it will receive 125,000 Singapore dollars (S$) in 30 days from a customer that has proven to be creditworthy in the past. Both futures contracts and appropriate options with maturity dates in 30 days are available. Under this scenario, what would be the best way for the MNC to hedge its position against fluctuations in the Singapore dollar's value? a. Sell a put option b. Buy S$ futures c. Sell S$ futures d. Buy a put option
c
A firm sells a currency futures contract, and then decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by a. selling an identical futures contract. b. selling a futures contract for a different amount of currency. c. buying an identical futures contract. d. buying a futures contract with a different settlement date.
c
According to interest rate parity (IRP) a. the forward rate differs from the spot rate by a sufficient amount to offset the inflation rate differential between two currencies. b. the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies. c. the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies. d. the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies
c
Assume that the New Zealand inflation rate is higher than the U.S. inflation rate. This will cause U.S. consumers to ________ their imports from New Zealand and New Zealand consumers to ________ their imports from the U.S. According to purchasing power parity (PPP), this will results in a(n) ________ of the New Zealand dollar (NZ$). a. Increase; reduce; appreciation b. Increase; reduce; depreciation c. Reduce; increase; depreciation d. Reduce; increase; appreciation
c
Assume that the inflation rate in Singapore is 3 percent, while the inflation rate in the United States is 8 percent. According to PPP, the Singapore dollar should ____ by ____percent. a. depreciate; 3,11 b. appreciate; 3.11 c. appreciate; 4.85 d. depreciate; 4.85
c
Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP7. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the Mexican peso (MXP) should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____. a. remain stable; appreciate b. depreciate; appreciate c. appreciate; appreciate d. appreciate; depreciate e. depreciate; depreciate
c
1) You have $100,000 to invest 2) The current ask quote for Australian dollars (A$) in the spot market is $0.71 3) The current bid quote for Australian dollars (A$) in the spot market is $0.70 4) The one-year forward rate (ask) for A$ is $0.71 5) The one year forward rate (bid) for A$ is $0.70 6) The one-year U.S. interest rate is 7% 7) The one-year Australian interest rate is 9%. If you conduct covered interest arbitrage, what U.S. dollar amount will you have after one year? a. $105,493.00 b. $153,521.10 c. $110,557.10 d. $107,464.80 e. None of these choices are correct.
d
According to ___________, a country with a higher interest rate will have higher expected inflation. a. purchasing power parity (PPP) b. A and B c. interest rate parity (IRP) d. the international Fisher effect (IFE)
d
According to the IFE, if British interest rates are lower than U.S. interest rates a. today's forward rate of the British pound will equal today's spot rate. b. the British pound will depreciate against the dollar. c. the British inflation rate will decrease. d. the British pound will appreciate against the dollar. e. the British pound's value will remain constant.
d
American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR); National Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve a. Locational arbitrage is not possible in this case. b. buying rupees from National Bank at the bid rate and selling them to American Bank at the ask rate. c. buying rupees from American Bank at the bid rate and selling them to National Bank at the ask rate. d. buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate. e. buying rupees from American Bank at the ask rate and selling to National Bank at the bid rate.
d
Among the reasons that purchasing power parity (PPP) does not consistently occur are a. Supply and demand may not adjust if no substitutable goods are available. b. Exchange rates are affected by interest rate differentials. c. Exchange rates are affected by national income differentials and government controls. d. All of these choices are reasons that PPP does not consistently occur.
d
Assume that U.S. and Argentine investors require a real return of 2 percent. If the U.S. nominal interest rate is 5 percent, and Argentina's nominral interest rate is 7 percent, then according to the IFE, the Argentine inflation rate is expected to be about ____ the U.S. inflation rate, and the Argentine peso is expected to ____. a. 3 percentage points below; depreciate by about 3 percent b. 3 percentage points below; appreciate by about 3 percent c. 2 percentage points below; appreciate by about 2 percent d. 2 percentage points above; depreciate by about 2 percent e. 3 percentage points above; depreciate by about 3 percent
d
Assume that interest rate parity does not hold, and Japanese investors are benefiting from covered interest arbitrage due to high interest rates in the U.S. Which of the following forces should result from this covered interest arbitrage activity? a. downward pressure on the yen's interest rate b. upward pressure on the U.S. interest rate c. downward pressure on the yen's forward rate d. downward pressure on the yen's spot rate
d
Assume that the Swiss interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true? a. Americans who invest in the United States earn the same rate of return as Swiss investors who invest in Switzerland. b. Americans who invest in the United States earn the same rate of return as Swiss investors who attempt covered interest arbitrage. c. Americans using covered interest arbitrage earn the same rate of return as Swiss investors who attempt covered interest arbitrage. d. Swiss investors who attempt covered interest arbitrage earn a higher return than American investors who attempt covered interest arbitrage.
d
Assume the following information: 1) You have $300,000 to invest 2) Current spot rate of Chilean peso (CLP) is $0.00350 3) Expected spot rate of pesos in 90 days is $0.00354 4) 90-day forward rate of the pesos is $0.00356 5) 90-day interest rate in the U.S. is 3.7% 6) 90-day interest rate in Chile is 4.0% If you conduct covered interest arbitrage, the return you will realize after 90 days is ________%. a. 3.70 b. 4.00 c. 5.19 d. 5.78 e. None of these choices are correct.
d
Assume the following information: 1) You have $900,000 to invest 2) Current spot rate of Australian dollar (A$) is $0.62 3) 180-day forward rate of the Australian dollar is $0.64 4) 180-day interest rate in the U.S. is 3.5% 5) 180-day interest rate in Australia is 3.0% If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days? a. $31,500 b. $27,000 c. $61,548.39 d. $56,903.23
d
Assume you discovered an opportunity for locational arbitrage involving two banks and have taken advantage of it. Because of your and other arbitrageurs' actions, the following adjustments must take place. a. One bank's ask price will fall and the other bank's bid price will rise. b. One bank's bid/ask spread will widen and the other bank's bid/ask spread will fall. c. One bank's ask price will rise and the other bank's bid price will fall. d. [One bank's ask price will rise and the other bank's bid price will fall.] and [One bank's bid/ask spread will widen and the other bank's bid/ask spread will fall.]
d
Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $0.02. If the spot rate at the option's maturity turns out to be $1.54, what is Carl's profit or loss per unit (assuming the buyer of the option acts rationally)? a. $0.01 b. -$0.03 c. -$0.04 d. -$0.01 e. $0.04
d
Forward contracts contain a. a commitment to the owner, and are standardized. b. a right but not a commitment to the owner, and can be tailored to the owner's desire. c. a right but not a commitment to the owner, and are standardized. d. a commitment to the owner, and can be tailored to the owner's desire.
d
Put and call options are available on Canadian dollars (C$) with the following information: - Call option premium on Canadian dollar = $.03 per unit - Put option premium on Canadian dollar = $.02 per unit - Call option strike price = $0.77 - Put option strike price = $0.77 - One option contract represents C$50,000. If the spot price of the Canadian dollar at option expiration is $0.80, the profit or loss from the short straddle position is a $________ per unit. Assume that you do not own any previously purchased Canadian dollars. a. 0.05 loss b. 0.02 loss c. 0.05 profit d. 0.02 profit e. 0.03 profit
d
Real interest rates in the U.K. are 6%, while real interest rates in the U.S. are 5%. The spot rate for the British pound (£) is $1.50. According to the international Fisher effect (IFE), the British pound should adjust to a new level of a. $1.49. b. $1.44. c. $1.51. d. The international Fisher effect suggests none of these choices are correct
d
The interest rate in the United Kingdom is 7 percent, while the interest rate in the United States is 5 percent. The spot rate for the British pound is $1.50. According to the international Fisher effect (IFE), the British pound should adjust to a new level of a. $1.57. b. $1.43. c. $1.53. d. $1.47
d
The nominal interest rate in Fiji is 3%, while the nominal interest rate in the U.S. is 5%. Real interest rates in both countries are 2%. According to purchasing power parity (PPP), the Fijian dollar (F$) may be expected to ________ by ________%. a. Depreciate; 1.94 b. Appreciate; 1.94 c. Depreciate; 1.98 d. Appreciate; 1.98
d
The one-year forward rate of the British pound is quoted at $1.50, and the spot rate of the British pound is quoted at $1.515. The forward ____ is ____ percent. a. discount; 1.0 b. discount; 1.5 c. premium; 1.5 d. premium; 1.0
d
When the futures price is equal to the spot rate of a given currency, and the foreign country exhibits a higher interest rate than the U.S. interest rate, astute investors may attempt to simultaneously ________ the foreign currency, invest it in the foreign country, and ________ futures in the foreign currency. a. Sell; sell b. Sell; buy c. Buy; buy d. Buy; sell
d
Which of the following contingency graphs best describes the potential profit or loss for the buyer of a currency put option? a. http://cnow.apps.ng.cengage.com/ilrn/books/maif13h/images/ch05/maif13h_ch05_MC37d.gif b. http://cnow.apps.ng.cengage.com/ilrn/books/maif13h/images/ch05/maif13h_ch05_MC37b.gif c. http://cnow.apps.ng.cengage.com/ilrn/books/maif13h/images/ch05/maif13h_ch05_MC37a.gif d. http://cnow.apps.ng.cengage.com/ilrn/books/maif13h/images/ch05/maif13h_ch05_MC37c.gif
d
Which of the following is true regarding purchasing power parity (PPP)? a. The absolute form of PPP suggests that prices of similar products of two different countries should be equal when measured in a common currency. b. The relative form of PPP accounts for the possibility of market imperfections. c. PPP focuses on the exchange rate-inflation relationship. d. All of these choices are true regarding PPP
d
Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and a. the inflation differential. b. the forward discount or premium. c. the income differential. d. none of the above
a
Using currency derivatives for speculation is not consistent with the general operations of an MNC. a. True b. False
a
Trebble, Inc. is a U.S.-based MNC that will need 2 million euros in 90 days to purchase European imports. Therefore, Trebble purchases a forward contract at a forward rate of $1.05. If the spot rate of the euro in 90 days is $1.00, Trebble will pay $________ for the euros and ________ incur an opportunity cost. a. 2,100,000; does b. 2,000,000; does c. 2,000,000; does not d. 2,100,000; does not e. None of these choices are correct.
a
A strangle can be constructed in a variety of ways. a. True b. False
a
A theory relating exchange rate changes to the nominal interest rate differential between two countries is the international Fisher effect (IFE). a. True b. False
a
Assume a statistical test is run, where actual exchange rate changes are regressed on the hypothesized exchange rate changes according to the IFE. The hypothesized values of the intercept and coefficient are 0.0 and 1.0, respectively. a. True b. False
a
Assume that interest rate parity exists and will continue to exist. The U.S. interest rate was 4% while the Singapore interest rate was 5% at the beginning of the month. Assume the Singapore interest rate rises while the U.S. interest rate declines over the month. Based on this information, the forward rate of the Singapore dollar exhibited a______ at the beginning of the month, and _______by the end of the month. a. discount; the size of the discount increased b. discount; discount changed to a premium c. premium; changed to a discount d. premium; the size of the premium increased
a
Assume that the Canadian inflation rate is expected to exceed the U.S. inflation rate over the next year. If interest rate parity and the international Fisher effect theories hold, then the one-year forward rate of the Canadian dollar will exhibit a _______, and the spot rate of the Canadian dollar will _____________ over the next year. a. discount; depreciate b. discount; appreciate c. premium; depreciate d. premium; appreciate
a
To obtain the value of Currency Y in units of Currency Z, you would divide the value of Currency Y in dollars by the value of Currency Z in dollars. a. True b. False
a
Assume the following information: -US investors have $1000 to invest - 1 year deposit rate offered on US dollars 12% - 1 year deposit rate offered on Singapore dollars 10% - 1 year forward rate on Singapore dollars $.412 - spot rate of Singapore dollars $.400 a. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. b. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. c. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically. d. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.
a
Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the ringgit. What will be the profit for an investor that has $500,000 available to conduct locational arbitrage? a. $1,639 b. $500 c. $9,804 d. $2,041,667
a
Due to ____, market forces should realign the spot rate of a currency among banks. a. locational arbitrage b. quadratic arbitrage c. covered interest arbitrage d. triangular arbitrage
a
Even if covered interest arbitrage appears feasible after accounting for transaction costs, the act of investing funds overseas is subject to political risk. a. True b. False
a
If U.S. firms attempt to use covered interest arbitrage to capitalize on the high Argentine peso interest rate, what forces should occur? a. Spot rate of peso increases; forward rate of peso decreases. b. Spot rate of peso decreases; forward rate of peso decreases. c. Spot rate of peso increases; forward rate of peso increases. d. Spot rate of peso decreases; forward rate of peso increases.
a
If nominal Canadian interest rates are 2% and nominal U.S. interest rates are 6%, then the Canadian dollar (C$) is expected to ________ by about ________%, according to the international Fisher effect (IFE) a. Appreciate; 3.92 b. Depreciate; 3.92 c. Depreciate; 4.00 d. None of these choices are correct
a
If the underlying currency depreciates substantially, the straddle writer has to buy the currency for the strike price, since the call option will be exercised. a. True b. False
a
If your firm expects the euro to substantially appreciate, it could speculate by ____ euro call options or ____ euros forward in the forward exchange market. a. purchasing; purchasing b. selling; selling c. purchasing; selling d. selling; purchasing
a
Many MNCs use forward contracts. a. True b. False
a
Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets. a. True b. False
a
Points lying below the PPP line represent purchasing power disparity; in this case, home country goods are cheaper from the foreign consumers' perspective. a. True b. False
a
Put and call options are available on Canadian dollars (C$) with the following information: - Call option premium on Canadian dollar = $.03 per unit - Put option premium on Canadian dollar = $.02 per unit - Call option strike price = $0.77 - Put option strike price = $0.77 - One option contract represents C$50,000. If you construct a short straddle position, what are the two break-even points for this position? a. $0.72 and $0.82 b. $0.74 and $0.80 c. $0.74 and $0.82 d. $0.75 and $0.80 e. $0.75 and $0.79
a
Put and call options are available on euros (€) with the following information: - Call option premium on euro = $.02 per unit - Put option premium on euro = $.015 per unit - Call option strike price = $1.12 - Put option strike price = $1.10 - One option contract represents €62,500. Peter Porter constructs a long strangle using euros. What are the two break-even points for this position? a. $1.065 and $1.155 b. $1.065 and $1.135 c. $1.005 and $1.135 d. $1.085 and $1.115 e. $1.095 and $1.155
a
Research in finance indicates that when an exchange rate deviates far from the value that would have been expected according to purchasing power parity (PPP), it moves towards that value. a. True b. False
a
Since futures contracts are standardized, an MNC using futures contracts to hedge foreign payable or receivable positions may not be able to hedge the amount of the payable or receivable perfectly. a. True b. False
a
The following is a graphical representation of the purchasing power parity (PPP) line: The dashed line is the PPP line. Which of the following is not true (assume that there are no market imperfections)? a. Any point lying to the left of the PPP line represent covered interest arbitrage opportunities for home country investors. b. Any point lying to the left of the PPP line represent higher home consumers' purchasing power with respect to foreign goods than home goods. c. Any point lying on the PPP line represent purchasing power parity. d. Any point lying to the right of the PPP line represent cheaper foreign goods than home country goods from a foreign consumer's perspective.
a
The following regression was conducted for the exchange rate of the Cyprus pound (CYP): Regression results indicate that α = 0 and α = 2. Therefore, a. Purchasing power parity underestimated the exchange rate change during the period under examination. b. Purchasing power parity will overestimate the exchange rate change of the Cyprus pound in the future. c. Purchasing power parity overestimated the exchange rate change during the period under examination. d. Purchasing power parity holds.
a
The inflation rate in the U.S. is 4%, while the inflation rate in Japan is 1.5%. The current exchange rate for the Japanese yen (¥) is $0.0080. After supply and demand for the Japanese yen has adjusted according to purchasing power parity, the new exchange rate for the yen will be a. $0.0082. b. $0.0078. c. $0.00492. d. $0.0111. e. None of these choices are correct.
a
The premium on a pound put option is $.04 per unit. The exercise price is $1.60. The break-even point is ____ for the buyer of the put, and ____ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.) a. $1.56; $1.56 b. $1.56; $1.60 c. $1.64; $1.56 d. $1.64; $1.64
a
Check My Work The following is a graphical representation of the IFE line: The dashed line is the IFE line. Which of the following is not true (assume that there are no market imperfections)? a. Any point lying to the right of the PPP line indicates that returns from foreign investments will be lower than those from those available at home. b. Any point lying to the left of the IFE line represents opportunities for home country investors to earn higher returns than those available domestically. c. [Any point lying to the left of the IFE line represents opportunities for home country investors to earn higher returns than those available domestically.] and [Any point lying to the right of the PPP line indicates that returns from foreign investments will be lower than those from those available at home.] are not true. d. All of these choices are true. e. Any point lying on the IFE indicates that the international Fisher effect holds.
c
Hewitt Bank quotes a value for the Japanese yen (¥) of $0.007, and a value for the Canadian Dollar (C$) of $0.821. The cross exchange rate quoted by the bank for the Canadian dollar is ¥118.00. You have $5,000 to conduct triangular arbitrage. How much will you end up with if you conduct triangular arbitrage? a. $6,053.27 b. $6,090.13 c. $5,030.45 d. Triangular arbitrage is not possible in this case
c
If interest rates on the euro are consistently above U.S. interest rates, then for the international Fisher effect (IFE) to hold a. the value of the euro would often appreciate against the dollar. b. the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation. c. the value of the euro would often depreciate against the dollar. d. the value of the euro would remain constant most of the time.
c
Put and call options are available on euros (€) with the following information: - Call option premium on euro = $.02 per unit - Put option premium on euro = $.015 per unit - Call option strike price = $1.12 - Put option strike price = $1.10 - One option contract represents €62,500. The maximum loss for the long strangle position is $________ per unit. The maximum loss occurs at future spot prices ________. a. 0.035; above the call option strike price b. 0.035; below the put option strike price c. 0.035; between the two exercise prices d. 0.015; between the two exercise prices e. 0.02; between the two exercise prices
c
The following is a graphical representation of the interest rate parity (IRP) line: The dashed line is the IRP line. Which of the following is not true (assume that there are no market imperfections)? a. Any point lying to the right of the IRP line represent covered interest arbitrage opportunities for home country investors. b. Any point lying to the left of the IRP line represent covered interest arbitrage opportunities for foreign investors. c. Any point lying to the left of the IRP line represent covered interest arbitrage opportunities for home country investors. d. Any point lying on the IRP line represent interest rate parity.
c
The longer the time to the expiration date for a currency, the ____ will be the premium of a call option, and the ____ will be the premium of a put option, other things being equal. a. lower; greater b. greater; lower c. greater; greater d. lower; lower
c
When the existing spot rate exceeds the exercise price, a call option is ________, and a put option is ________. a. Out of the money; in the money b. Out of the money; out of the money c. In the money; out of the money d. In the money; in the money
c
Which of the following contingency graphs best describes the potential profit or loss for the buyer of a currency call option? a. http://cnow.apps.ng.cengage.com/ilrn/books/maif13h/images/ch05/maif13h_ch05_MC36c.gif b. http://cnow.apps.ng.cengage.com/ilrn/books/maif13h/images/ch05/maif13h_ch05_MC36b.gif c. http://cnow.apps.ng.cengage.com/ilrn/books/maif13h/images/ch05/maif13h_ch05_MC36a.gif d. http://cnow.apps.ng.cengage.com/ilrn/books/maif13h/images/ch05/maif13h_ch05_MC36d.gif
c
Which of the following is not true regarding interest rate parity (IRP)? a. When the interest rate in the foreign country is higher than that in the home country, the forward rate of that country's currency should exhibit a discount. b. When the interest rate in the foreign country is lower than that in the home country, the forward rate of that country's currency should exhibit a premium. c. When covered interest arbitrage is not feasible, interest rate parity must hold. d. When interest rate parity holds, covered interest arbitrage is not possible. e. All of these choices are true.
c
According to the international Fisher effect (IFE), a. [Home country investors will earn the same return on foreign investments as on domestic investments.], [Foreign country investors will earn the same return on foreign investments than on domestic investments.], and [Home country investors will earn the higher of the return on foreign country investments and home country investments.] b. Home country investors will earn the higher of the return on foreign country investments and home country investments. c. Foreign country investors will earn the same return on foreign investments than on domestic investments. d. Home country investors will earn the same return on foreign investments as on domestic investments. e. [Home country investors will earn the same return on foreign investments as on domestic investments.] and [Foreign country investors will earn the same return on foreign investments than on domestic investments.]
e
If interest rate parity does not hold, covered interest arbitrage may be possible. Before deciding whether to conduct covered interest arbitrage, which of the following factors does not need to be investigated? a. Political risk b. Transaction costs c. Taxes d. Currency restrictions e. All of these choices should be considered
e