exam 2 Fin 2604

The international monetary system went through several distinct stages of evolution. These stages are summarized, in alphabetic order, as follows: (i) - Bimetallism (ii) - Bretton Woods system (iii) - Classical gold standard (iv) - Flexible exchange rate regime (v) - Interwar period

(i), (iii), (v), (ii), and (iv)

Today's CPI number is hotter than expected:The consumer price index rose 0.4% in Sept, vs a 0.3% rise expected by economists polledby Reuters.In the 12 months through September, the CPI increased 5.4%, up from a 5.3% year-on-yearadvance in August.Excluding the volatile food and energy components, the core CPI climbed 0.2% last month, upfrom 0.1% in August.This new data likely contributed to __________

-Biden Administration's decision to help key West Coast ports stay open 24-7 to ease supply chain bottlenecks -rise in gold prices -Some firms consider replacing vaccine mandates with vaccine requirements nswernswer -The Fed possibly announces taper timeline in Nov meeting

The dollar index - which measures the U.S. currency against a basket of six major currencies -rose for the fourth consecutive day, to 94.112, its highest since early November 2020. Afterreading the Reuter's article, which of the following factors do you think drives the rise of USD?There can be more than one correct answer.

-Increased expectations for a reduction in the U.S. Federal Reserve's asset purchases starting in November and an interest rate hike, possibly in late 2022 -the global savings glut set to be drawn towards USD -higher than expected inflation

Suppose the quote for a five-year swap with semiannual payments is 2.50—2.60 percent in dollars against six-month dollar LIBOR. This means ___________________. -the swap bank will pay semiannual fixed-rate dollar payments of 2.60 percent against receiving six-month dollar LIBOR -the swap bank will pay semiannual fixed-rate dollar payments of 2.50 percent against receiving six-month dollar LIBOR

-the swap bank will pay semiannual fixed-rate dollar payments of 2.50 percent against receiving six-month dollar LIBOR

In a currency swap, ________________________________ . -it may be the possible that each firm enjoys a lower cost of funding -All of the statements are correct -it may be the case that two counterparties have equivalent credit ratings -it may be the case that firms have a comparative advantage in borrowing in their domestic markets

All of the statements are correct

According to the famous Triffin paradox, if the U.S.' government wants to have a free-floating exchange rate, then _________________________. the United States can still have fiscal and monetary policy independence the United States can still allow capital to flow freely across its border the United States has to accept FX volatility all

All of the statements are correct The famous Triffin paradox states that no matter which policy regime it chooses, a central bank can never achieve all three of the following goals at the same time: Exchange rate stability, capital mobility, and monetary policy autonomy.

Which of the following correctly explains the potential disadvantage of a freely floating exchange rate regime? A freely floating exchange rate may compound a country's inflationary problem. It is because if a country experiences high levels of inflation, its currency may weaken. A weaker currency can cause import prices to rise, which can increase the prices of materials and supplies and subsequently the price of the finished goods, compounding the country's inflationary problem. All the arguments are correct A freely floating exchange rate may compound a country's inflationary problem. It is because if a country experiences high levels of inflation, its currency may weaken. Higher foreign prices may force domestic consumers to buy domestic products. Recognizing that their foreign competition has been reduced by the weak home currency, domestic producers may raise prices without fearing losing customers to foreign competition, compounding the country's inflationary problem. A freely floating exchange rate regime may adversely affect a country that has high unemployment. It is because if the unemployment rate is high, the demand for import will decrease, putting appreciation pressure on the home currency. A stronger home currency will cause domestic consumers to purchase foreign, rather than domestic products, because the foreign products are now cheaper. This reaction of domestic consumers can be detrimental to a country during periods of high unemployment.

All the arguments are correct

Which of the following is FALSE? -As a broker, the swap bank matches counterparties but does not assume any of the risks of the swap. -At the inception of an interest-only interest rate swap, the equivalent principal amounts are exchanged at the spot rate. -The swap market offers price discovery to market participants. -The primary reason for a counterparty to use a currency swap is to obtain debt financing in the swapped currency at an interest cost reduction brought about through comparative advantages each counterparty has in its national capital market. -All types of debt instruments are not regularly available for all borrowers. Swaps assist in tailoring financing to the type desired by a particular borrower.

At the inception of an interest-only interest rate swap, the equivalent principal amounts are exchanged at the spot rate. At the inception of the currency swap, the equivalent principal amounts are exchanged at the spot rate. In interest-only interest rate swaps, principal does not actually change hands, hence the term notional or theoretical principal. Notional principal is used only as a reference measure to determine interest payments

According to the famous Triffin paradox, if the Chinese government wants to fix the value of its currency, then _________________________.

China can no longer have an open economy (i.e. allowing free flow of capital), if it also desires an interest rate that is free from outside influence

Company X and Company Y have mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time). Company X has a AAA credit rating, but company Y's credit standing is considerably lower.

Company X should more readily agree to a swap involving Company Y if there is a swap bank providing credit risk intermediation.

Which of the following currencies is part of the IMF's Special Drawing Right Basket?

Euro, Japanese Yen, US dollar, British pound, Chinese RMB

A European option is different from an american option in that _____.

European options can only be exercised at maturity; American options can be exercised prior to maturity

Which of the following is a BENEFIT of the eurozone?

Firms can engage in international trade within the eurozone without incurring foreign exchange transaction costs.

A swap bank has identified two companies with mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time.) Company X has agreed to one leg of the swap but company Y is "playing hard to get."

If the swap bank has already contracted one leg of the swap, they should be anxious to offer better terms to company Y to just get the deal done.

Which of the following is a COST of the eurozone?

Loss of national monetary autonomy

Which of the following statement is FALSE?

Most large developed countries such as the United States, the United Kingdom, Australia, Canada, and Japan combine government intervention with market forces to set exchange rates.

Which of the following statements is FALSE? The Bretton Woods agreement of 1944 replaced the gold standard with the U.S. dollar as the global currency. Under the Bretton Woods system, the U.S. dollar was the only currency that was full convertible to gold because after WWII, the United States held three-fourths of the world's supply of gold. No other countries had enough gold to back its currency. The Bretton Woods system created the World Bank to enforce the agreement and serve the function of the global central bank from which member countries can borrow. Under the Bretton Woods system, each country had to have a monetary policy that kept the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold. The Bretton Woods system failed because the supply of the U.S. dollar as not sufficient to support the growth in global trade and the related financial transactions.

The Bretton Woods system created the World Bank to enforce the agreement and serve the function of the global central bank from which member countries can borrow. the Bretton Woods system created the International Monetary Fund to enforce the agreement and serve the function of the global central bank.

A swap bank quotes 5-year swaps for AAA-rated firms at 7.0—7.2 percent in Euro against dollar LIBOR flat. This means ________________________.

The bank stands ready to pay €7.0% against receiving dollar LIBOR on 5-year loans

Which of the following statements is FALSE? -The favored currencies for cross-currency basis-swaps are the U.S. dollar, Chinese RMB, and Korean won.The favored currencies for cross-currency basis-swaps are the U.S. dollar, Euro, and Japanese yen. -Japanese Yen as a haven asset will depreciate if global economic indicators are strong and investors are optimistic about the capital markets. -Monetary policies (e.g., cutting interest rates) have less simulative effect on the economy when interest rates are close to zero (i.e., zero-bound interest rate) because it is difficult for financial institutions to pass on negative interest rates to consumers. -Inverted yield curves occur when short-term debt instruments have a higher interest rate than long-term debt instruments. -When two firms both have better name recognition in their home countries than in the other's country where they are trying to raise funds, they may utilize a currency swap to take advantage of their comparative advantage.

The favored currencies for cross-currency basis-swaps are the U.S. dollar, Chinese RMB, and Korean won.The favored currencies for cross-currency basis-swaps are the U.S. dollar, Euro, and Japanese yen.

Hong Kong has pegged its currency—Hong Kong dollar (HKD)—to the U.S. dollar since 1983. Which of the following highlights the downside of this FX arrangement?

The peg resulted in the replacement of the local currency with the U.S. dollar.

The majority of countries got off the gold standard in 1914 when ______________ .

World War I broke out

Which of the following statements regarding futures contract is correct?

a futures contract is a standardized contract between two parties to buy or sell an asset at a specified price on a future date

Basis risk in a swap refers to ______________________ .

a situation in which the floating rates of the two counterparties are not pegged to the same index

the big mac index was invented by the economist in 1986 as a lightened guide to whether the currencies are at their "correct" level. it is based on the ____purchasing power parity

absolute

IMF forecasts that inflation will return to pre-pandemic levels by mid-2022 if

advanced economies have ample labor supply

Special Drawing Rights (SDR) are _________________________ . used in addition to gold and foreign exchanges, to make international payments all of the choices are correct an artificial international reserve allotted to the members of the International Monetary Fund (IMF), who can then use it for transactions among themselves or with the IMF a "portfolio" of currencies, and its value tends to be more stable than the currencies that it is comprised of

all of the choices are correct

Which of the following is a Benefits of the eurozone? Investors who reside in the eurozone can invest in stock in member countries without worrying about exchange rate risk. All consumers and businesses both inside and outside the eurozone enjoy price transparency and increased price-based competition. All the statements are correct. It encourages more long-term international trade arrangements between firms within the eurozone because they no longer have to worry about exposure to future foreign exchange movements.

all the statements are correct

which of the following statements regarding forward contracts is correct?

both buyers and sellers of a forwards contracts face non-trivial counterparty risk

exports of goods and services are entered into balances of payments as _____, while imports of goods and services are entered into balance of payments as ___.

credits; debits

With regard to the current exchange rate arrangement between the U.S. and the U.K., it is best characterized as _____________ .

currency board

which of the following statements is false? -the price of currency futures will be similar to the forward rate -most currency futures contracts are closed out before the settlement date. -currency futures is a non-binding contract that locks in for a future trade in FX at a specified exchange rate -sellers (buyers) of a currency futures can close out their positions by buying(selling) identical futures contracts prior to settlement -currency futures are often sold by speculators who expect that the spot rate of a currency will be less than the rate at which they would be obligation to sell it.

currency futures is a non-binding contract that locks in for a future trade in FX at a specified exchange rate

A __________ is an agreement in which two parties exchange the principal amount of a loan and the interest in one currency for the principal and interest in another currency

currency swap

a higher level of exports from the untied states to the united kingdom decreases the supply of british pounds

false

Which of the following properties DOES NOT explain why gold has served such an important role as international means of payments?

gold is very heavy

Under a purely flexible exchange rate system, _______________________________________ .

governments can set the exchange rate by restricting capital flow

Which of the following graph is the payoff profile of a call option?

graph A (flat and then upward sloping ____/ )

to correctly execute coverage interest arbitrage, you should borrow in currency whose interest rate is ___ than the market interest rate

higher

Suppose the quote for a five-year swap with semiannual payments is 8.50—8.60 percent in dollar against dollar LIBOR (London Interbank Offered Rate) flat. It means ________________________ .

if the swap bank is successful in getting counterparties to both legs of the swap at these prices, the bank will have an annual profit of ten basis points

Which of the following is false? -in-the-money options are more expensive, the less in-the-money they are -a put option on $15,000 with a strike price pf 10,000 euros is the same thing as a call option on 10,000 euros with a strike price of $15,000 -American call and put premiums should be at least as large as their intrinsic value -speculators who expect a currency to appreciate should purchase call options on that currency -for American options, the intrinsic value is the difference between the time value and the market value

in-the-money options are more expensive, the less in-the-money they are

____________ is a group made up of 190 member countries that promotes international financialstability and monetary cooperation. It also acts as a lender of last resort to countries in financialdistress.

international monetary fund

In July 1944, 730 delegates from 44 nations signed the Bretton Woods agreement, establishing

international monetary fund & world bank

Which of the following is the payoff profile of the buyer of a forward contract? line a (runs from bottom left to top right) line b (runs from top left to bottom right)

line a

which of the following is the payoff profile of the buyer of a futures contract? line a (runs from bottom left to top right) line b (runs from top left to bottom right)

line a

Which of the following is the payoff profile of the seller of a forward contract? line a (runs from bottom left to top right) line b (runs from top left to bottom right)

line b

which of the following is the payoff profile of the seller of a futures contract? line a (runs from bottom left to top right) line b (runs from top left to bottom right)

line b

The advent of the euro marks the first time that sovereign countries have voluntarily given up their ____________ .

monetary independence to foster economic integration

Assume a spot price of 112.01, which of the following American put options is out of the money? Exercise price Put premium Option 1 111 0.66 Option 2 113 1.57

option 1

Assume a spot price of 112.01, which of the following American call options is out of the money? Exercise price Call premium Option 1 111 1.83 Option 2 113 0.76

option 2

_____ is a trade with the objective to profit by trading on expectations about prices in the future, which is in contrast with _____ whose objective is to reduce risks

speculation, hedging

During the period of the classical gold standard, there were ___________________ .

stable exchange rates

Suppose the quote for a five-year swap with semiannual payments is 2.11—2.22 percent in dollars and 3.60—4.80 percent in euro against six-month dollar LIBOR. The means _______________________. the swap bank will enter into a currency swap in which it would pay semiannual fixed-rate dollar payments of 2.11 percent against receiving semiannual fixed-rate euro payments of 4.80. the swap bank will enter into a currency swap in which it would pay semiannual fixed-rate euro payments of 3.60 percent against receiving semiannual fixed-rate dollar payments of 2.22 both

that both statements are correct

Under the Bretton Woods system, ______________________.

the U.S. dollar was the only currency that was fully convertible to gold; other currencies were not directly convertible to gold

which of the following statements is incorrect? -speculation is a trade with the objective to profit by trading on expectations about prices in the future -put options give the holder the right, but not the obligation, to sell a given quantity of an asset at some time in the future at a price agreed upon today. -the buyer of an option is referred to as the writer of the option -stock can be viewed as an option with zero exercise price

the buyer of an option is referred to as the writer of the option

A major risk faced by a swap dealer is mismatch risk. This is ____________________.

the difficulty in finding a second counterparty for a swap that the bank has agreed to take with another party

when a currency trades at a discount rate in the foreign market

the forward rate is less than the spot rate

With regard to a swap bank acting as a dealer in swap transactions, interest rate risk refers to ___________________.

the risk that interest rates changing unfavorably before the swap bank can lay off to an opposing counterparty on the other side of an interest rate swap entered into with the first counterparty

Suppose the quote for a five-year swap with semiannual payments is 8.50—8.60 percent in dollars and 6.60—6.80 percent in euro against six-month dollar LIBOR. The means _______________________.

the swap bank will enter into a currency swap in which it would pay semiannual fixed-rate dollar payments of 8.50 percent against receiving semiannual fixed-rate euro payments of 6.80

which of the following economies has the highest consumer spending?

the united states

One potential drawback of the gold standard is ________________ .

the world economy can be subject to inflationary pressure without changes in the supply of monetary gold

for an american call option, B and A in the graph are ______, respectively.

time value and intrinsic value (line b is over line a and they meet at the top)

Because of their ____, American call and put premium should be at least as large as their ____.

time value, intrinsic value

carry trade is built upon the principal of covered interest arbitrage with one important modification- no hedging

true

in a pure flexible exchange rate regime, a country's central banks will not need to maintain official reserves

true

since parity conditions are long-term equilibrium conditions, they hold on average, but frequently deviations do occur

true

the vast majority of the foreign-exchange reserves held by central banks are denominated in ____.

us dollars

for the same maturity, we should have ______.

value of in-the-money options> value of at-the-money options> value of out-of-money options

Assume you are the holder of a call option on 10,000 euros. the option premium is $0.25 per euro. the exercise price is $1.125 per euro. should you exercise the call option if the current market price is $1.50 per euro?

yes (because as the holder of the call option, the option is in the money (X>X)

With any hedge ___________________________________________.

your losses on one side should about equal your gains on the other side