FIN400 Test 2
A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02. What is the break-even price for the option? Select one: a. $2.07/£ b. The answer depends upon if this is a long or a short call option. c. $2.03/£ d. $2.05/£
$2.07/£
Jack Hemmings bought a 3-month British pound futures contract for $1.4400/£ only to see the dollar appreciate to a value of $1.4250 at which time he sold the pound futures. If each pound futures contract is for an amount of £62,500, how much money did Jack gain or lose from his speculation with pound futures? Select one: a. $937.50 gain b. £937.50 gain c. £937.50 loss d. $937.50 loss
$937.50 loss
Phillips NV produces DVD players and exports them to the United States. Last year the exchange rate was $1.25/euro and Phillips charged 120 euro per player in Euroland and $150 per DVD player in the United States. Currently the spot exchange rate is $1.45/euro and Phillips is charging $160 per DVD player. What is the degree of pass through by Phillips NV on their DVD players? Select one: a. 92% b. 4.1% c. 33.3% d. 41.7%
41.7%
A currency board is: Select one: a. a recipe for conservative and prudent financial management. b. designed to eliminate the power of politicians to exercise judgment by relying on an automatic and unbendable rule. c. a structure, rather than a mere commitment, to limiting the growth of the money supply in the economy. d. All of these
All of these
The main advantage(s) of over-the-counter foreign currency options over exchange traded options is (are): Select one: a. expiration dates tailored to the needs of the client. b. amounts that are tailor made. c. client desired expiration dates. d. All of these
All of these
Which of the following did NOT contribute to the Russian currency crisis of 1998? Select one: a. generally deteriorating economic conditions b. All of these c. a surprisingly healthy government surplus that was neither funding internal investment nor external debt service d. an accelerated flight of capital
All of these
Which of the following is NOT a motivation for a government or central bank to manipulate domestic currency valuation? Select one: a. slow too rapid economic growth b. fight inflation c. All of these are motivations for the government or central bank to manipulate currency values. d. spur too slow economic growth
All of these are motivations for the government or central bank to manipulate currency values.
Which of the following is NOT an assumption of market efficiency? Select one: a. All of these are true. b. All relevant information is quickly reflected in both spot and forward exchange markets. c. Transaction costs are low or nonexistent. d. Instruments denominated in other currencies are perfect substitutes for one another.
All of these are true.
Which of the following did NOT contribute to the exchange rate collapse in emerging markets in the 1990s? Select one: a. infrastructure weaknesses b. the sharp reduction of cross-border foreign direct investment c. speculation on the part of market participants d. All of these contributed to the emerging markets exchange rate collapse of the 1990s.
All of these contributed to the emerging markets exchange rate collapse of the 1990s.
Direct intervention for currency valuation involves limiting the ability to exchange domestic currency for foreign currency. Select one: True False
False
If a central bank wishes to "defend its currency," it might follow an expansive monetary policy, which would drive real rates of interest up. Select one: True False
False
Interest rate calculations differ by the number of days used in the period's calculation and in the definition of how many days there are in a year (for financial purposes). One of the practices is to use 260 business days in a year. Select one: True False
False
Interest rate futures are relatively unpopular among financial managers because of their relative illiquidity and their difficulty of use. Select one: True False
False
Option values increase with the length of time to maturity. The expected change in the option premium from a small change in the time to expiration is termed delta. Select one: True False
False
Technical analysts, traditionally referred to as chartists, focus on fundamental data to determine past trends that are expected to continue into the future. Select one: True False
False
The London Interbank Offered Rate (LIBOR) is published under the auspices of the British Bankers Association. A panel of 16 major multinational banks self-report their actual borrowing rate. Select one: True False
False
The authors claim that random events, institutional frictions, and technical factors may cause currency values to deviate significantly from their long-term fundamental path. Select one: True False
False
The current U.S. dollar-yen spot rate is ¥125/$. If the 90-day forward exchange rate is ¥127/$ then the yen is at a forward premium. Select one: True False
False
The longer the time horizon of the technical analyst the more accurate the prediction of foreign exchange rates is likely to be. Select one: True False
False
If a financial manager with an interest liability on a future date were to sell Futures and interest rates end up going down, the position outcome would be: Select one: a. Future price falls; long earns a loss. b. Futures price falls; short earns a profit. c. Futures price rises; long earns a profit. d. Futures price rises; short earns a loss.
Futures price rises; short earns a loss.
________ is the alteration of economic or financial fundamentals that are thought to be drivers of capital to flow in and out of specific currencies. Select one: a. Direct Intervention b. Indirect Intervention c. Capital Controls d. Foreign Direct Investment
Indirect Intervention
An agreement to exchange interest payments based on a fixed payment for those based on a variable rate (or vice versa) is known as a/an: Select one: a. interest rate swap. b. interest rate future. c. forward rate agreement. d. None of these
Interest rate swap.
________, traditionally referred to as chartists, focus on price and volume data to determine past trends that are expected to continue into the future. Select one: a. Filibusters b. Technical analysts c. Trappist monks d. Mappists
Technical analysts
If the forward rate is an unbiased predictor of the expected spot rate, which of the following is NOT true? Select one: a. The distribution of possible actual spot rates in the future is centered on the forward rate. b. The future spot rate will actually be equal to what the forward rate predicts. c. All of these are true. d. The expected value of the future spot rate at time 2 equals the present forward rate for time 2 delivery, available now.
The future spot rate will actually be equal to what the forward rate predicts.
Which of the following is NOT true for the writer of a call option? Select one: a. All of these are true. b. The maximum gain is unlimited. c. The maximum loss is unlimited. d. The gain or loss is equal to but of the opposite sign of the buyer of a call option.
The maximum gain is unlimited.
All that is required for a covered interest arbitrage profit is for interest rate parity to not hold. Select one: True False
True
As long as the option has time remaining before expiration, the option will possess time the time value element. Select one: True False
True
Currency futures contracts have become standard fare and trade readily in the world money centers. Select one: True False
True
Historically, interest rate movements have shown less variability and greater stability than exchange rate movements. Select one: True False
True
If exchange markets were efficient, the deviation of the actual future quote and today's forward rate will be zero. Select one: True False
True
If exchange markets were not efficient, it would pay for a firm to spend resources on forecasting exchange rates. Select one: True False
True
In their approximate form, PPP, IRP, and forward rates as an unbiased predictor of the future spot rate lead to similar forecasts of the future spot rate. Select one: True False
True
It is safe to say that most determinants of the spot exchange rate are also affected by changes in the spot rate. i.e., they are linked AND mutually determined. Select one: True False
True
Leading up to the Russian currency collapse of 1998, Russia followed a currency policy of managed float that allowed their currency to slide daily at a 1.5% per month rate. Select one: True False
True
Most theories of technical analysis differentiate fair value from market value. Select one: True False
True
The basis point spreads between credit ratings dramatically rise for borrowers of credit qualities less than BBB. Select one: True False
True
The expected change in the option premium from a small change in the domestic interest rate (home currency) is term rho. Select one: True False
True
The large and liquid capital and currency markets follow many of the principles outlined by the different schools of thought on exchange rate determination (parity conditions, balance of payments approach, and asset approach) relatively well in the medium to long term. Select one: True False
True
The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients. Select one: True False
True
The more efficient the foreign exchange market is, the more likely it is that exchange rate movements are random walks. Select one: True False
True
The price of an option is always somewhat greater than its intrinsic value, since there is always some chance that the intrinsic value will rise between the present and the expiration date. Select one: True False
True
Instruction 8.1: For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. ∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. ∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% ∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%. Refer to Instruction 8.1. After the fact, under which set of circumstances would you prefer strategy #3? (Assume your firm is borrowing money.) Select one: a. Not enough information to make a judgment. b. Your credit rating stayed the same and interest rates went up. c. Your credit rating improved and interest rates went down. d. Your credit rating stayed the same and interest rates went down.
Your credit rating improved and interest rates went down.
The ________ provides a means to account for international cash flows in a standardized and systematic manner. Select one: a. International Fisher Effect b. asset approach c. balance of payments d. parity conditions
balance of payments
According to the International Fisher Effect, the forecast change in the spot rate between two countries is equal to: Select one: a. the current spot rate multiplied by the ratio of the inflation rates in the respective countries. b. but the opposite sign to the difference between inflation rates. c. but the opposite sign to the difference between real interest rates. d. but the opposite sign to the difference between nominal interest rates.
but the opposite sign to the difference between nominal interest rates.
According to the International Fisher Effect, the forecast change in the spot rate between two countries is equal to: Select one: a. the current spot rate multiplied by the ratio of the inflation rates in the respective countries. b. but the opposite sign to the difference between real interest rates. c. but the opposite sign to the difference between inflation rates. d. but the opposite sign to the difference between nominal interest rates.
but the opposite sign to the difference between nominal interest rates.
Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. Jasper should ________ at ________ to profit from changing currency values. Select one: a. buy dollars; the forward rate b. buy yen; the forward rate c. There is not enough information to answer this question. d. sell yen; the forward rate
buy yen; the forward rate
Empirical tests have yielded ________ evidence about market efficiency with a general consensus that developing foreign markets are ________. Select one: a. consistent; inefficient b. conflicting; efficient c. None of these d. conflicting; not efficient
conflicting; not efficient
The potential exposure that any individual firm bears that the second party to any financial contract will be unable to fulfill its obligations under the contract is called: Select one: a. counterparty risk. b. interest rate risk. c. credit risk. d. clearinghouse risk.
counterparty risk.
The single largest interest rate risk of a firm is: Select one: a. accounts payable. b. interest sensitive securities. c. dividend payments. d. debt service.
debt service.
The price elasticity of demand for DVD players manufactured by Sony of Japan is greater than one. If the Japanese yen appreciates against the U.S. dollar by 10% and the price of the Sony DVD players in the U.S also rises by 10%, then other things equal, the total dollar sales revenues of Sony DVDs would: Select one: a. increase. b. decline. c. insufficient information d. stay the same.
decline.
The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to: Select one: a. pay floating and receive fixed. b. do nothing. c. None of these d. receive floating and pay fixed.
do nothing.
Argentina's economic performance in the 1990s while their peso was pegged to the U.S. dollar can be characterized as ________ rates of inflation and ________ rates of unemployment. Select one: a. high; low b. low; low c. high; high d. low; high
low; high
As a general statement, it is safe to say that businesses generally use the ________ for foreign currency option contracts, and individuals and financial institutions typically use the ________. Select one: a. over-the-counter; exchange markets b. exchange markets; over-the-counter c. private; government sponsored d. government sponsored; private
over-the-counter; exchange markets
The ________ is the Argentine currency unit. Select one: a. real b. dollar c. peso d. peseta
peso
Individual borrowers - whether they be governments or companies - possess their own individual credit rating, the market's assessment of their ability to repay debt in a timely manner. These credit assessments influence all the following EXCEPT: Select one: a. cost of capital b. access to capital c. credit risk premium d. risk-free rate
risk-free rate
The financial manager of a firm has a variable rate loan outstanding. If she wishes to protect the firm against an unfavorable increase in interest rates she could: Select one: a. None of these b. swap the adjustable rate loan for another of a different maturity. c. buy an interest rate futures contract of a similar maturity to the loan. d. sell an interest rate futures contract of a similar maturity to the loan.
sell an interest rate futures contract of a similar maturity to the loan.
Instruction 8.1: For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. ∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. ∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% ∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%. Refer to Instruction 8.1. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #3 is: (Assume your firm is borrowing money.) Select one: a. that interest rates might go up or that your credit rating might get worse. b. that interest rates might go up or that your credit rating might improve. c. that interest rates might go down or that your credit rating might improve. d. None of these
that interest rates might go up or that your credit rating might get worse.
Exchange rate pass-through may be defined as: Select one: a. the PPP of lesser-developed countries. b. the bid/ask spread on currency exchange rate transactions. c. the degree to which the prices of imported and exported goods change as a result of exchange rate changes. d. the practice by Great Britain of maintaining the relative strength of the currencies of the Commonwealth countries under the current floating exchange rate regime.
the degree to which the prices of imported and exported goods change as a result of exchange rate changes.
The forward rate is calculated from all the following observable data items EXCEPT: Select one: a. the home currency deposit rate b. the forecast of the future spot exchange rate c. the spot exchange rate d. the foreign currency deposit rate
the forecast of the future spot exchange rate
According to the Big Mac Index, the implied PPP exchange rate is Mexican peso 8.50/$1 but the actual exchange rate is peso 10.80/$1. Thus, at current exchange rates the peso appears to be ________ by ________. Select one: a. undervalued; approximately 27% b. overvalued; approximately 21% c. overvalued; approximately 27% d. undervalued; approximately 21%
undervalued; approximately 21%
Assume the current U.S. dollar-British spot rate is 0.6993£/$. If the current nominal one-year interest rate in the U.S. is 5% and the comparable rate in Britain is 6%, what is the approximate forward exchange rate for 360 days? Select one: a. £0.6993/$ b. £0.7060/$ c. £1.43/$ d. £1.42/$
£0.7060/$
Other things equal, and assuming efficient markets, if a Honda Accord costs $24,682 in the U.S., then at an exchange rate of $1.57/£, the Honda Accord should cost ________ in Great Britain. Select one: a. £15,721 b. £38,751 c. £10,795 d. £24,682
£15,721
A major U.S. multinational firm has forecast the euro/dollar rate to be €1.10/$ one year hence, and an exchange rate of $1.40 for the British pound (£) in the same time period. What does this imply the company's expected rate for the euro per pound to be in one year? Select one: a. £1.40/€ b. €1.40/£ c. £1.54/€ d. €1.54/£
€1.54/£
