Final 3

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$.01

Assume that IRP holds. The U.S. five-year interest rate is 5% per year while the Mexican five-year rate is 8% per year. If today's spot rate of the peso is $.20, obtain the approximate 5-year forecast of the peso's spot rate using the 5-year forward rate.

$.174

The inflation rate in the United States is 3 percent while the inflation rate in Japan is 10 percent. The current exchange rate for the Japanese yen (¥) is $0.0075. After supply and demand for the Japanese yen have adjusted in the manner suggested by purchasing power parity, the new exchange rate for the yen will be:

$0.0070.

The inflation rate in the United States is 4 percent, while the inflation rate in Japan is 1.5 percent. The current exchange rate for the Japanese yen (¥) is $0.0080. After supply and demand for the Japanese yen have adjusted according to purchasing power parity, the new exchange rate for the yen will be

$0.0082.

Assume the following information. You have $1,000,000 to invest. Current sport rate of pound = $1.60 90-day forward rate of pound= $1.57 3-month deposit rate in U.S. = 3% 3-month deposit rate in U.K.= 4% If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?

$1,020,500

Assume the following information. You have $1,000,000 to invest. Current spot rate of pound= $1.30 90-day forward rate of pound= $1.28 3-month deposit rate in U.S.= 2.25% 3-month deposit rate in U.K.= 4% If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have in 90 days?

$1,024,000

A call option exists on British pounds with an exercise price of $1.60, 90-day expiration date, and a premium of $.03 per unit. A put option also exists on British pounds with an exercise price of $1.60, 90-day expiration date, and a premium of $.02 per unit. You plan to use options to cover your future receivables of ₤700,000 in 90 days. You will exercise the option in 90 days (if at all). The spot rate of the pound turns out to be $1.57, 90 days later. Determine the net amount of dollars to be received from the receivable

$1,106,000

Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. The highest net profit possible on the option for the speculator based on the information above is:

-$1,562

c. covered interest arbitrage

1. Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies. a. forward realignment arbitrage b. triangular arbitrage c. covered interest arbitrage d. locational arbitrage

Which of the following is true regarding the euro?

1. Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders. 2. It allows for more consistent economic conditions across countries. 3. It prevents each country from conducting its own monetary policy.

c. purchase Canadian dollar put options.

1. Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances? a. purchase Canadian dollars forward. b. purchase Canadian dollar futures contracts. c. purchase Canadian dollar put options. d. purchase Canadian dollar call options.

Which of the following is not true regarding the Mexican peso crisis?

1. Mexico encouraged firms and consumers to buy an excessive amount of imports because the peso was stronger than it should have been. 2. Many speculators based in the U.S. speculated on the potential decline in the peso by investing their funds in Mexico. 3. In December of 1994, the central bank of Mexico allowed the peso to float freely. 4. The central bank of Mexico increased interest rates after the peso declined in value in order to prevent investors from withdrawing their investments in Mexico's debt securities.

d. be less than; surplus

1. The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound, U.S. demand for pounds would ________ the supply of pounds for sale and there would be a _______ of pounds in the foreign exchange market. a. exceed; shortage b. be less than; shortage c. exceed; surplus d. be less than; surplus e. be equal to; shortage

Which of the following are examples of currency controls?

1. import restrictions. 2. prohibition of remittance of funds. 3. ceilings on granting credit to foreign firms.

b. the forward rate is less than the existing spot rate.

150. A forward rate for a currency is said to exhibit a discount if a. the forward rate exceeds the existing spot rate. b. the forward rate is less than the existing spot rate. c. the forward rate exceeds the expected future spot rate. d. the forward rate is less than the expected future spot rate. e. none of the above

d. 1.46

151. 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. 1.50 b. 1.47 c. 1.55 d. 1.46 e. None of the above

c. There is an active over-the-counter market for currency futures contracts.

152. Which of the following is not true regarding futures contracts? a. Unlike forward contracts, they are generally traded on an exchange. b. Futures contracts are standardized with respect to delivery date and size of the contract. c. There is an active over-the-counter market for currency futures contracts. d. Currency futures can be used by speculators who attempt to profit from exchange rate movements.

a. upward; downward

153. When the futures price is above the forward rate, astute investors may attempt to simultaneously buy a currency forward and sell futures in that currency. These actions would place ____ pressure on the forward rate and ____ pressure on the futures rate. a. upward; downward b. upward; upward c. downward; upward d. downward; downward

b. 100,000

154. 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. Sell a futures contract; buy a futures contract after the currency has depreciated

155. Which of the following would result in a profit of a futures contract when the underlying currency depreciates? a. Buy a futures contract; sell a futures contract after the currency has depreciated b. Sell a futures contract; buy a futures contract after the currency has depreciated c. Buy a futures contract; buy an additional futures contract after the currency has depreciated d. None of the above would result in a profit when the underlying currency of the futures contract depreciates.

a. buy; buy

156. Currency futures can be used by MNCs to hedge payables. That is, an MNC would ____ futures to hedge a foreign payable position. Also, currency futures can be used for speculation. For example, a speculator expecting a currency to appreciate would ____ futures. a. buy; buy b. sell; sell c. buy; sell d. sell; buy

a. Options are traded on exchanges, never over-the-counter.

157. Which of the following is not true regarding options? a. Options are traded on exchanges, never over-the-counter. b. Similar to futures contracts, margin requirements are normally imposed on option traders. c. Although commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per contract. d. Currency options can be classified as either put or call options. e. All of the above are true.

d. in the money; out of the money

158. 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; in the money d. in the money; out of the money

b. the spot rate of the currency is greater than the exercise price of the option.

159. When a currency call option is classified as "in the money," this indicates that a. the spot rate of the currency is less than the exercise price of the option. b. the spot rate of the currency is greater than the exercise price of the option. c. 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. d. 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.

d. $24,390.

21. Assume the bid rate of a Singapore dollar is $.40 while the ask rate is $.41 at Bank X. Assume the bid rate of a Singapore dollar is $.42 while the ask rate is $.425 at Bank Z. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with? a. $11,764. b. −$11,964. c. $36,585. d. $24,390. e. $18,219.

d. upward pressure on the Swiss franc's forward rate.

12. Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from the act of this covered interest arbitrage? a. upward pressure on the Swiss franc's spot rate. b. upward pressure on the U.S. interest rate. c. downward pressure on the Swiss interest rate. d. upward pressure on the Swiss franc's forward rate.

b. interest rates.

12. When using indirect intervention, a central bank is likely to focus on: a. inflation. b. interest rates. c. income levels. d. expectations of future exchange rates.

d. $1,639 RATIONALE: $500,000/$.305 = MYR1,639,344 × $.306 = $501,639. Thus, the profit is $1,639.

21. Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage? a. $2,041,667 b. $9,804 c. $500 d. $1,639

d. sell a euro call and buy a euro put

21. If you expect the euro to depreciate, it would be appropriate to ____ for speculative purposes. a. buy a euro call and buy a euro put b. buy a euro call and sell a euro put c. sell a euro call and sell a euro put d. sell a euro call and buy a euro put

b. larger will be the forward premium of the foreign currency.

22. Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the: a. larger will be the forward discount of the foreign currency. b. larger will be the forward premium of the foreign currency. c. smaller will be the forward premium of the foreign currency. d. smaller will be the forward discount of the foreign currency.

a. purchasing; selling

22. If you expect the British pound to appreciate, you could speculate by ____ pound call options or ____ pound put options. a. purchasing; selling b. purchasing; purchasing c. selling; selling d. selling; purchasing

C. 7.6 percent premium [(F/S) − 1] × 360/90 = 7.6 percent.

4. The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro? a. 1.9 percent discount. b. 1.9 percent premium. c. 7.6 percent premium. d. 7.6 percent discount.

c. sell a futures contract on francs.

12. Which of the following is the most unlikely 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. obtain a forward contract to purchase francs forward. c. sell a futures contract on francs. d. all of the above are appropriate strategies for the scenario described.

a. in the money.

40. A call option on Australian dollars has a strike (exercise) price of $.56. The present exchange rate is $.59. This call option can be referred to as: a. in the money. b. out of the money. c. at the money. d. at a discount.

a. A$39.93.

40. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars should you expect to receive for your baht? a. A$39.93. b. A$25,043.48. c. A$553.00. d. none of the above

e. about 10.63 RATIONALE: $500,000/$.41 = NZ$1,219,512 × (1.08) = NZ$1,317,073 × .42 = $553,171 Yield = ($553,171 − $500,000)/$500,000 = 10.63%

15. Assume the following information: Current spot rate of New Zealand dollar = $.41 Forecasted spot rate of New Zealand dollar 1 year from now = $.43 One-year forward rate of the New Zealand dollar = $.42 Annual interest rate on New Zealand dollars = 8% Annual interest rate on U.S. dollars = 9% Given the information in this question, the return by U.S. investors with $500,000 to invest is ______ percent. a. about 11.97 b. about 9.63 c. about 11.12 d. about 11.64 e. about 10.63

a. larger will be the forward discount of the foreign currency.

15. Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the: a. larger will be the forward discount of the foreign currency. b. larger will be the forward premium of the foreign currency. c. smaller will be the forward premium of the foreign currency. d. smaller will be the forward discount of the foreign currency.

b. greater; greater

15. The greater 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 equal. a. greater; lower b. greater; greater c. lower; greater d. lower; lower

b. out of the money.

41. A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put option can be referred to as: a. in the money. b. out of the money. c. at the money. d. at a discount.

c. $15.43.

41. National Bank quotes the following for the British pound and the New Zealand dollar: Quoted Bid Price Quoted Ask Price Value of a British pound (£) in $ $1.61 $1.62 Value of a New Zealand dollar (NZ$) in $ $.55 $.56 Value of a British pound in New Zealand dollars NZ$2.95 NZ$2.96 Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy? a. $77.64. b. $197.53. c. $15.43. d. $111.80.

a. $56,903.

42. Assume the following information: You have $900,000 to invest: Current spot rate of Australian dollar (A$) = $.62 180-day forward rate of the Australian dollar = $.64 180-day interest rate in the U.S. = 3.5% 180-day interest rate in Australia = 3.0% If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days? a. $56,903. b. $61,548. c. $27,000. d. $31,500.

e. all of the above are instruments used to cover foreign currency positions.

42. Which of the following is not an instrument used by U.S.-based MNCs to cover their foreign currency positions? a. forward contracts. b. futures contracts. c. non-deliverable forward contracts. d. options. e. all of the above are instruments used to cover foreign currency positions.

d. $416,068.77.

43. Assume the following information: You have $400,000 to invest: Current spot rate of Sudanese dinar (SDD) = $.00570 90-day forward rate of the dinar = $.00569 90-day interest rate in the U.S. = 4.0% 90-day interest rate in Sudan = 4.2% If you conduct covered interest arbitrage, what amount will you have after 90 days? a. $416,000.00. b. $416,800.00. c. $424,242.86. d. $416,068.77. e. none of the above

b. buy; sell

43. When the futures price on euros is below the forward rate on euros for the same settlement date, astute investors may attempt to simultaneously ____ euros forward and ____ euro futures. a. sell; sell b. buy; sell c. sell; buy d. buy; buy

a. $318,109.10.

44. Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what amount will you have after 180 days? a. $318,109.10. b. $330,000.00. c. $312,218.20. d. $323,888.90. e. none of the above

c. buy; sell

44. 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. buy; buy b. sell; buy c. buy; sell d. buy; buy

d. low unemployment and high inflation in the U.S.

5. A weak dollar is normally expected to cause: a. high unemployment and high inflation in the U.S. b. high unemployment and low inflation in the U.S. c. low unemployment and low inflation in the U.S. d. low unemployment and high inflation in the U.S.

b. spot and exercise; spot

54. A call option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a call option premium is the ____ price. a. spot and exercise; exercise b. spot and exercise; spot c. exercise and spot; exercise d. exercise and spot; spot

d. premium; about 6.45% Premium = (Forward rate − Spot rate)/Spot rate = ($.66 − $.62)/$.62 = 6.45%

55. Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. The forward rate exhibits a ____ of ____. a. premium; about 6% b. discount; about 6% c. discount; about 6.45% d. premium; about 6.45%

d. discount; 10.81% Discount = [(FR − SR)/SR] × (360/90) = [($.36 − $.37)/$.37] × (360/90) = −10.81% (Discount)

56. Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The forward rate of this currency exhibits a ____ of ____ on an annualized basis. a. discount; 11.11% b. premium; 11.11% c. premium; 10.81% d. discount; 10.81%

b. futures contracts.

57. Which of the following are most commonly traded on an exchange? a. forward contracts. b. futures contracts. c. currencies d. none of the above

b. options where the premiums are canceled if a trigger level is reached.

58. Conditional currency options are: a. options that do not require premiums. b. options where the premiums are canceled if a trigger level is reached. c. options that allow the buyer to decide what currency the option will be settled in. d. none of the above

c. Hedgers and speculators are both necessary in order for the market to be liquid.

59. Which of the following is true regarding the options markets? a. Hedgers and speculators both attempt to lower risk. b. Hedgers attempt to lower risk, while speculators attempt to make riskless profits. c. Hedgers and speculators are both necessary in order for the market to be liquid. d. all of the above

b. high unemployment and low inflation in the U.S.

6. A strong dollar is normally expected to cause: a. high unemployment and high inflation in the U.S. b. high unemployment and low inflation in the U.S. c. low unemployment and low inflation in the U.S. d. low unemployment and high inflation in the U.S.

b. U.S. dollars.

6. In the U.S., the typical currency futures contract is based on a currency value in terms of: a. euros. b. U.S. dollars. c. British pounds. d. Canadian dollars.

d. B and C

6. When using ____, funds are not tied up for any length of time. a. covered interest arbitrage b. locational arbitrage c. triangular arbitrage d. B and C

d. none of the above

60. The premium of a currency put option will increase if: a. the volatility of the underlying asset goes up. b. the time to maturity goes up. c. the spot rate declines. d. none of the above

c. The buyer decides if the option will be exercised.

61. Which of the following is true of options? a. The writer decides whether the option will be exercised. b. The writer pays the buyer the option premium. c. The buyer decides if the option will be exercised. d. More than one of these.

Generally, MNCs with less foreign costs than foreign revenues will be ____ affected by a ____ foreign currency.

A and D: favorably; stronger and adversely; weaker

A banker's acceptance is a draft drawn on and accepted by

A bank

When would a U.S. firm consider purchasing a call option on euros for hedging?

A call option can hedge a firm's future payables denominated in euros. It effectively locks in the maximum price to be paid for euros. A put option on euros can hedge a U.S. firm's future receivables denominated in euros. It effectively locks in the minimum price at which it can exchange euros received.

A call option on Australian dollars has a strike (exercise) price of $.56. The present exchange rate is $.59. This call option can be referred to as: a. in the money. b. out of the money. c. at the money. d. at a discount.

Forward contracts contain:

A commitment to the owner, and can be tailored to the desire of the owner.

With _____, the exporter ships the goods to the importer while still retaining actual title to the merchandise.

A consignment arrangement

Differentiate between a currency call option and a currency put option.

A currency call option provides the right to purchase a specified currency at a specified price within a specified period of time. A currency put option provides the right to sell a specified currency for a specified price within a specified period of time

Which of the following is an example of economic exposure?

An increase in the dollar's value hurts a US firm's domestic sales because foreign competitors are able to increase their sales to US customers

Assume that British corporations begin to purchase more supplies from the U.S. as a result of several labor strikes by British suppliers. This action reflects:

An increase in the supply of British pounds for sale.

If U.S. inflation suddenly increased while European inflation stayed the same, there would be:

An increased U.S. demand for euros and decreased supply of euros for sale.

If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be:

An inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.

Andrea is an option speculator. She anticipates the Canadian dollar to depreciate from its current level of $0.90 to $0.85. Currently, Canadian dollar call options are available with an exercise price of $0.91 and a premium of $0.02. Also, Canadian dollar put options are available with an exercise price of $0.88 and a premium of $0.02. If the future spot rate of the Canadian dollar is $0.85, what is Andrea's profit or loss per unit? a. $0.03 b. $0.05 c. $0.01 d. $0.04

Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the International Fisher Equation, the Swiss francs will _____ by about ______.

Appreciate, 2%

The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ____ by ____%.

Appreciated; 5.80

If interest rate is higher in the U.S. than in the U.K. and the forward rate of the British pound is the same as its spot rate, then:

Arbitrage flow of funds takes place from UK to US

Assume that Japan places a strict quota on goods imported from the U.S. and the U.S. places a strict quota on goods imported from Japan. This event should immediately cause the U.S. demand for Japanese yen to ____, and the supply of Japanese yen to be exchanged for U.S. dollars to ____. a. increase; increase b. increase; decline c. decline; decline d. decline; increase

Assume that U.S. inflation is expected to surge in the near future. The expectation of surge in inflation will most likely place ____ pressure on U.S. dollar immediately. a. upward b. downward c. no d. cannot be determined

B The premium of the option is $.05 x (31,250 units) = $1,562.50. Since the option will not be exercised, the net profit is -$1,562.50.

Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. The highest net profit possible for the speculator based on the information above is: a. $1,562.50. b. ¬$1,562.50. c. ¬$1,250.00. d. ¬$625.00.

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

Assume that the U.S. places a strict quota on goods imported from Chile and that Chile does not retaliate. Holding other factors constant, this event should immediately cause the U.S. demand for Chilean pesos to ____ and the value of the peso to ____. a. increase; increase b. increase; decline c. decline; decline d. decline; increase

A primary result of the Smithsonian Agreement was:

establishing that exchange rates of most major countries were to be allowed to fluctuate 2.25% above or below their initially set values.

A primary result of the Bretton Woods Agreement was:

establishing that exchange rates of most major currencies were to be allowed to fluctuate 1% above or below their initially set values.

The greater 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.

greater; greater

Which of the following is not a reason for devaluation of a currency?

high inflation.

A strong dollar is normally expected to cause:

high unemployment and low inflation in the U.S.

Assume Countries A, B, and C produce goods that are substitutes of each other and that these countries engage in trade with each other. Assume that Country A's currency floats against Country B's currency, and that Country C's currency is pegged to B's. If A's currency depreciates against B, then A's exports to C should ____, and A's imports from C should ____.

increase; decrease

Assume that the U.S. inflation rate is higher than the New Zealand inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the United States. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$).

increase; reduce; appreciation

If the Fed ____ the interest rates when inflationary expectations remain unchanged, the most likely result is that the value of dollar will ____ and the economy may ____.

increases; appreciate; weaken

Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered by U.S. banks = 10% 1-year deposit rate offered on British pounds = 13.5% 1-year forward rate of Swiss francs = $1.26 Spot rate of Swiss franc = $1.30 Given this information:

interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.

Countries that have adopted the euro tend to have very similar ____.

interest rates

When using indirect intervention, a central bank is likely to focus on:

interest rates.

According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries:

is due to their inflation differentials.

Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the:

larger will be the forward premium of the foreign currency.

As foreign exchange activity has grown, a given degree of central bank intervention has become:

less effective.

The currency of Country X is pegged to the currency of Country Y. Assume that Country Y's currency appreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z.

less; more

When currency options are not standardized and are traded over-the-counter, there is ____ liquidity and a ____ bid/ask spread.

less; wider

A weak dollar is normally expected to cause:

low unemployment and high inflation in the U.S

A weak dollar is normally expected to cause:

low unemployment and high inflation in the U.S.

Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S. nominal interest rate decreases while the Chilean nominal interest rate remains stable. According to the international Fisher effect, this implies expectations of ____ than before, and that the Chilean peso should ____ against the dollar.

lower U.S. inflation; depreciate

The value of the Canadian dollar, Japanese yen, and Australian dollar with respect to the U.S. dollar are part of a:

managed float system.

Countries that have adopted the euro must agree on a single ____ policy.

monetary

The currency of Country X is pegged to the currency of Country Y. Assume that Country Y's currency depreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z.

more; less

Assume that the Fed intervenes by exchanging dollars for euros in the foreign exchange market. This will cause an ____ U.S. dollars and an ____ euros.

outward shift in supply of; outward shift in demand for

In general, when speculating on exchange rate movements, the speculator will borrow the currency that is expected to appreciate and invest in the country whose currency is expected to depreciate.

False

The greater 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 equal.

Greater; greater

Call and put options premiums are affected by the level of existing spot price relative to the strike price. A ____ spot price relative to the strike price results in relatively ____ premium for a call option but a relatively ____ premium for a put option.

High; high; low

According to the International Fisher Equation and the Generalized Fisher Equation, if Venezuela has a much higher nominal interest rate than other countries, its inflation rate will be ______ than other countries, and its currency will _______.

Higher; weaken

If the U.S. and Japan engage in substantial financial flows but little trade, ____ directly influences their exchange rate the most. If the U.S. and Switzerland engage in much trade but little financial flows, ____ directly influences their exchange rate the most.

Interest rate differentials; inflation and income differentials.

If interest rate parity holds and the forward rate is expected to be an unbiased estimate (predictor) of the future spot rate, then which of the following is true?

International Fisher Equation holds

Which of the following are true about the Southeast Asian currency crisis?

It was preceded by several years of large capital inflows to Asia.

Based on interest rate parity theory, the larger the degree by which the foreign interest rate exceeds domestic interest rate, the________:

Larger will be the forward discount of the foreign currency

If a bank acknowledges that it will make payments on behalf of a beer importer after the beer is delivered to the importer. This reflects the use of:

Letter of credit

Due to ___, market forces should realign the spot rate of a currency among banks.

Locational arbitrage

Low; low; high

The shorter 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 equal.

Lower; lower

Which of the following is not true regarding the eurozone?

Members cannot apply their own fiscal policies.

Selling Currency Put Options. Brian Tull sold a put option on Canadian dollars for $.03 per unit. The strike price was $.75, and the spot rate at the time the option was exercised was $.72. Assume Brian immediately sold off the Canadian dollars received when the option was exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was Brian's net profit on the put option?

Premium received per unit = $.03 Amount per unit received from selling C$ = $.72 Amount per unit paid for C$ = $.75 Net profit per unit = $0

Assume that Interest Rate Parity (IRP) holds. The Mexican interest rate is 5%, and the U.S. interest rate is 8%. Subsequently, the U.S. interest rate decreases to 7%. If IRP is to continue to hold, then the peso's forward ________ will ________.

Premium; decrease

Which of the following payment terms provides the supplier with the greatest degree of protection?

Prepayment

Randy Rudecki purchased a call option on British pounds for $.02 per unit. The strike price was $1.45 and the spot rate at the time the option was exercised was $1.46. Assume there are 31,250 units in a British pound option. What was Randy's net profit on this option?

Profit per unit on exercising the option = $.01 Premium paid per unit = $.02 Net profit per unit = -$.01 Net profit per option = 31,250 units × (-$.01) = -$312.50

If a U.S. firm desired to lock in the maximum amount it would have to pay for its net payables in euros but still wanted to be able to capitalize if the euro depreciates substantially against the dollar by the time payment is to be made, the most appropriate hedge would be:

Purchasing euro call options

Latin American countries have historically experienced relatively high inflation rates and their currencies have weakened accordingly. This experience is consistent with the concept of:

Purchasing power parity

If a U.S. firm desired to lock in a minimum rate at which it could sell its net receivables in Japanese yen but wanted to be able to capitalize if the yen appreciates substantially against the dollar by the time payment arrives, the most appropriate hedge would be:

Purchasing yen put options

If you expect the British pound to appreciate, you could speculate by ________ pound call options or ________ pound put options.

Purchasing; selling

If you have acquired the right but not the obligation to sell, you are a

Put buyer/owner/holder

When you purchase ___, there is no obligation on your part; however, when you purchase ___, there is an obligation on your part.

Put options; forward contracts

Assume that a currency's spot and forward rates are the same, and the currency's Interest rate is higher the U.S. interest rate. The actions U.S. investors to capitalize on this higher foreign interest rate would ____ the currency's spot rate and ____ the currency's forward rate.

Put upward pressure on, put downward pressure on

Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If a U.S. firm uses covered interest arbitrage, which of the following price adjustments should result?

Spot rate of peso increases; forward rate of peso decreases

Assume that a U.S. firm can invest funds for one year in the United States at 12 percent or invest funds in Mexico at 14 percent. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces should occur?

Spot rate of peso increases; forward rate of peso decreases.

Which of the following countries have not adopted the euro?

Switzerland

Which of the following is not true regarding Thailand?

Thailand was one of the slowest growing countries before the Asian crisis.

C [(F/S) - 1] x 360/90 = 7.6 percent.

The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro? a. 1.9 percent discount. b. 1.9 percent premium. c. 7.6 percent premium. d. 7.6 percent discount.

According to the IFE, if British interest rates exceed U.S. interest rates,

The British pound will depreciate against the dollar

Assume that Swiss investors have francs available to invest in securities, and they initially view U.S. and British interest rates as equally attractive. Now assume that U.S. interest rates increase while British interest rates stay the same. This would likely cause:

The Swiss demand for dollars to increase and the dollar will appreciate against the Swiss franc.

The euro has not been adopted by:

The UK

Which of the following did not occur as a result of Bretton Woods Agreement?

The United States experienced no balance-of-trade deficits.

Due to ________, market forces should realign the difference between the cross exchange rate for a currency from, say points A and B, and the quoted rate for the same currency at point C.

Triangular arbitrage

The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound:

U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.

Assume the U.S. interest rate is 2 percentage points higher than the Swiss rate, and the forward rate of the Swiss franc has a 4 percent premium. Given this information:

U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the United States.

Under a fixed exchange rate system:

News of a potential surge in U.S. inflation and zero Chilean inflation places ____ pressure on the value of the Chilean peso. The pressure will occur ____.

Upward; Immediately

Assume the British interest rates are higher than U.S. rates, and that the spot rate for the pound equals the forward rate, then covered interest arbitrage puts ______ pressure on the pound's spot rate, and ______ pressure on the pound's forward rate.

Upward; downward

When the "real" interest rate is relatively low in a given country, then the currency of that country is typically expected to be:

Weak, since the country's quoted interest rate would be low relative to the inflation rate.

It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce unemployment. Which of the following is an appropriate action given this scenario?

Weaken the dollar

Forward contracts contain:

a commitment to the owner, and can be tailored to the owner's desire.

Currency options sold through an options exchange contain:

a right but not a commitment to the owner, and are standardized

34. An increase in U.S. inflation relative to Singapore inflation places upward pressure on the Singapore dollar. a. True b. False

a. True

37. Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen. a. True b. False

a. True

42. Signals regarding future actions of market participants in the foreign exchange market sometimes result in overreactions. a. True b. False

a. True

43. The markets that have a smaller amount of foreign exchange trading for speculatory purposes than for trade purposes will likely experience more volatility than those where trade flows play a larger role. a. True b. False

a. True

44. Liquidity of a currency can affect the extent to which speculation can impact the currency's value. a. True b. False

a. True

45. Forecasting a currency's future value is difficult, because it is difficult to identify how the factors affecting the currency value will change, and how they will interact to impact the currency's value. a. True b. False

a. True

59. Financial flow foreign exchange transactions are more responsive to news than trade- related transactions. a. True b. False

a. True

66. Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen, other things being equal. a. True b. False

a. True

Assume U.S. and Swiss investors require a real rate of return of 3 percent. Assume the nominal U.S. interest rate is 6 percent and the nominal Swiss rate is 4 percent. According to the international Fisher effect, the franc will ____ by about ____.

appreciate; 2 percent

49. The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is the value of euro today? a. $1.365 b. $1.235 c. $1.330 d. $1.30

b. $1.235

20. The exchange rates of smaller countries are very stable because the market for their currency is very liquid. a. True b. False

b. False

35. When expecting a foreign currency to depreciate, a possible way to speculate on this movement is to borrow dollars, convert the proceeds to the foreign currency, lend in the foreign country, and use the proceeds from this investment to repay the dollar loan. a. True b. False

b. False

36. Since supply and demand for a currency are constant (primarily due to government intervention), currency values seldom fluctuate. a. True b. False

b. False

38. The main effect of interest rate movements on exchange rates is through their effect on international trade. a. True b. False

b. False

39. Country X frequently engages in trade flows with the U.S. (such as imports and exports). Country Y frequently engages in capital flows with the U.S. (such as financial investments). Everything else held constant, an increase in U.S. interest rates would affect the exchange rate of Country X's currency more than the exchange rate of Country Y's currency. a. True b. False

b. False

40. Increases in relative income in one country vs. another result in an increase in the first country's currency value. a. True b. False

b. False

41. Traderelated foreign exchange transactions are more responsive to news than financial flow transactions. a. True b. False

b. False

46. The standard deviation should be applied to values rather than percentage movements when comparing volatility among currencies. a. True b. False

b. False

47. Movements of foreign currencies tend to be more volatile for shorter time horizons. a. True b. False

b. False

50. Government controls can only affect the supply of a given currency for sale and not the demand. a. True b. False

b. False

51. If one foreign currency will appreciate against the dollar, then all foreign currencies will appreciate against the dollar but by different degrees. a. True b. False

b. False

61. Country X frequently engages in trade flows with the U.S. (such as imports and exports). Country Y frequently engages in capital flows with the U.S. (such as financial investments). Everything else held constant, an increase in U.S. inflation would affect the exchange rate of Country Y's currency more than the exchange rate of Country X's currency. a. True b. False

b. False

63. When the Japanese yen appreciates against the U.S. dollar, this means that the U.S. dollar is strengthening relative to the yen. a. True b. False

b. False

64. Illiquid currencies tend to exhibit less volatile exchange rate movements than liquid currencies. a. True b. False

b. False

65. The supply curve for a currency is downward sloping since U.S. corporations would be encouraged to purchase more foreign goods when the foreign currency is worth less. a. True b. False

b. False

67. If the British government desires an appreciation in its currency with respect to the U.S. dollar, it would consider intervening in the foreign exchange market by buying dollars with pounds. a. True b. False

b. False

68. Country X frequently engages in trade flows with the U.S. (such as imports and exports). Country Y frequently engages in financial flows with the U.S. (such as financial investments). Everything else held constant, an increase in U.S. interest rates would affect the exchange rate of Country X's currency more than the exchange rate of Country Y's currency. a. True b. False

b. False

9. In general, when speculating on exchange rate movements, the speculator will borrow the currency that is expected to appreciate and invest in the country whose currency is expected to depreciate. a. True b. False

b. False

71. Which of the following events would most likely result in an appreciation of the U.S. dollar? a. U.S. inflation is very high. b. The Fed indicates that it will raise U.S. interest rates. c. Future U.S. interest rates are expected to decline. d. Japan is expected to increase interest rates in the near future.

b. The Fed indicates that it will raise U.S. interest rates.

2. If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction. a. liquid; highly sensitive b. illiquid; insensitive c. illiquid; highly sensitive d. none of the above.

c. illiquid; highly sensitive

Under a fixed exchange rate system:

central bank intervention in the foreign exchange market is often necessary.

Thornton, Inc. needs to invest 5 million Nepalese rupees in its Nepalese subsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction. Thus, Thornton would:

convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today's forward rate.

Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies

covered interest arbitrage

Points above the IRP line represent situations where:

covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets.

12. The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound: a. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market. b. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market. c. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market. d. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market. e. U.S. demand for pounds would be equal to the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.

d. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.

Assume that U.S. investors are benefiting from covered interest arbitrage due to high interest rates on euros. Which of the following forces should result from this covered interest arbitrage activity?

downward pressure on the euro's forward rate

A strong dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which in turn place ____ pressure on U.S. bond prices.

downward; downward; upward

A strong dollar places ____ pressure on inflation, which in turn places ____ pressure on the dollar.

downward; upward

10. Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The following annual interest rates apply: Currency Lending Rate Borrowing Rate Dollars 7.10% 7.50% New Zealand dollar (NZ$) 6.80% 7.25% Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the fiveday period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)? a. $521,325. b. $500,520. c. $104,262. d. $413,419. e. $208,044.

e. $208,044. 1. Borrow $5 million. 2. Convert to NZ$: $5,000,000/$.48 = NZ$10,416,667. 3. Invest the NZ$ at an annualized rate of 6.80% over five days. NZ$10,416,667 ́ [1 + 6.80% (5/360)] = NZ$10,426,505 4. Convert the NZ$ back to dollars: NZ$10,426,505 ́ $.50 = $5,213,252 5. Repay the dollars borrowed. The repayment amount is: $5,000,000 ́ [1 + 7.5% (5/360)] = $5,000,000 ́ [1.00104] = $5,005,208 6. After repaying the loan, the remaining dollar profit is: $5,213,252 $5,005,208 = $208,044

3. ____ is not a factor that causes currency supply and demand schedules to change. a. Relative inflation rates b. Relative interest rates c. Relative income levels d. Expectations e. All of the above are factors that cause currency supply and demand schedules to change.

e. All of the above are factors that cause currency supply and demand schedules to change

70. Which of the following is not mentioned in the text as a factor affecting exchange rates? a. Relative interest rates b. Relative inflation rates c. Government controls d. Expectations e. All of the above are mentioned in the text as factors affecting exchange rates.

e. All of the above are mentioned in the text as factors affecting exchange rates.

31. Which of the following is not mentioned in the text as a factor affecting exchange rates? a. relative interest rates. b. relative inflation rates. c. government controls. d. expectations. e. all of the above are mentioned in the text as factors affecting exchange rates.

e. all of the above are mentioned in the text as factors affecting exchange rates.

Assume that interest rate parity holds. The U.S. interest rate is 13 percent and the British interest rate is 10 percent. The forward rate on British pounds exhibits a ____ of ____ percent.

premium; 2.73

To force the value of the pound to appreciate against the dollar, the Federal Reserve should:

sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market.

To force the value of the British pound to depreciate against the dollar, the Federal Reserve should:

sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.

To weaken the dollar using sterilized intervention, the Fed will ____ U.S. dollars and simultaneously ____ Treasury securities.

sell; sell

Assume that the interest rate in the home country of Currency X is much higher than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:

should exhibit a discount.

One of the best-known pegged exchange rate arrangements that was established by several European countries in April 1972 and was difficult to maintain is called the:

snake agreement.

If the international Fisher effect (IFE) did not hold based on historical data, this would suggest that:

some corporations with excess cash could have generated higher profits on average from foreign short-term investments than from domestic short-term investments.

The Fed may use a stimulative monetary policy with least concern about causing inflation if the dollar's value is expected to:

strengthen

The international Fisher effect (IFE) suggests that the foreign currency will appreciate when:

the current home nominal interest rate exceeds the current foreign nominal interest rate.

According to the international Fisher effect (IFE):

the exchange rate-adjusted rate of return on a foreign investment should be equal to the interest rate on a local money market investment.

Given a home country and a foreign country, purchasing power parity (PPP) suggests that:

the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.

If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher effect (IFE) to hold:

the value of the euro would often appreciate against the dollar.

From a financial management perspective, which of the following is true regarding the introduction of the Euro?

transactions costs decline for MNCs that conduct transactions within Europe.

A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally?

$36,400.

You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is:

-$.02.

Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances?

Purchase Canadian dollar put options.

Currency futures contracts sold on an exchange contain:

a commitment to the owner, and are standardized.

Among the reasons that purchasing power parity (PPP) does not consistently occur are:

all of the above are reasons that PPP does not consistently occur.

If interest rate parity exists, then ____ is not feasible.

covered interest arbitrage

The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British pound is quoted at $1.63. The forward ____ is ____ percent.

discount; 1.8

The shorter 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.

lower; lower

If you expect the euro to depreciate, it would be appropriate to ____ for speculative purposes.

sell a euro call and buy a euro put

According to the IFE, if British interest rates exceed U.S. interest rates:

the British pound will depreciate against the dollar.

Which of the following is true regarding the euro?

All of the above are true.

Assume that during a given period the nominal interest rate in Cyprus was 7% while the nominal interest rate in the US was 5%. The spot rate for the Cyprus pound ($/CYP) started at $1.50. At the end of the period, according to the IFE, the Cyprus pound should adjust to a new level of:

$1.47

Given that annual deposit rates for Dollars and Euros are 6% and 4% respectively for the next 5 years. If the current spot rate of the Euro is $1.4015, obtain the implied rate for the Euro five years from now if International Fisher Equation holds exactly.

$1.5415

The premium on a pound put option is $.03 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.)

$1.57; $1.57

c. covered interest arbitrage

4. If interest rate parity exists, then ____ is not feasible. a. forward realignment arbitrage b. triangular arbitrage c. covered interest arbitrage d. locational arbitrage

Assume the bid rate of the New Zealand dollar is $.33 [.825] while the ask rate is $.335 [.8375] at Bank X. Assume the bid rate of the New Zealand dollar is $.32 [.800] while the ask rate is $.325 [.8125] at Bank Y. Given this information what will be your profit if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the initial $1,000,000?

$15,385

Assume that the bid rate for Australian dollar $.60 [.9650] while the ask rate is $.61 [.9811] at Bank A. Also assume that the bid rate for the Australian dollar is $.62 [.9972] while the ask rate is $.625 [1.0052] at Bank B. What would be your profit if have $100,000 and you execute locational arbitrage ?

$1639.30

a. covered interest arbitrage

7. When using ____, funds are typically tied up for a significant period of time. a. covered interest arbitrage b. locational arbitrage c. triangular arbitrage d. B and C

Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The following annual interest rates apply: Numbers Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the five-day period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)?

$208,044

Assume the following information: U.S. deposit rate for 1 year= 11% U.S. borrowing rate for 1 year =12% New Zealand deposit rate for 1 year = 8% New Zealand borrowing rate for 1 year =10% New Zealand dollar forward rate for 1 year= $.40 (1.0652) New Zealand dollar spot rate =$.39 (1.0561) Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and expects to receive NZ$600,000 in 1 year. Using the information provided, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a money market hedge?

$236,127

Assume the following information: U.S. deposit rate for 1 year = 11% U.S. borrowing rate for 1 year =12% Swiss deposit rate for 1 year =8% Swiss borrowing rate for 1 year = 10% Swiss franc forward rate for 1 year = $.40 (1.0652) Swiss franc spot rate= $.39 (1.0561) Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year. Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a forward hedge?

$240,000

Assume that Smith Corporation needs to pay ₤200,000 in 90 days. A call option Exists on British pounds with an exercise price of $1.68, 90-day expiration date, and a premium of $.04. A put option also exists on British pounds, with an exercise price of $1.69, 90-day expiration date, and a premium of $.03. Smith Corporation plans to use options to cover its future payables. It will exercise the option, if at all, in 90 days. If the spot rate of the pound turns out to be $1.76 in 90 days, determine the net dollar cost of the payables.

$344,000

A U.S. corporation has purchased currency call options to hedge a ₤70,000 payable. The premium is $.02 [.05] and the exercise price of the option is $.50 [$1.50]. If the spot rate at the time of maturity is $.65 [$1.65], what is the total amount paid by the corporation if it acts rationally?

$36,400

a. monetary

9. Countries that have adopted the euro must agree on a single ____ policy. a. monetary b. fiscal c. worker compensation d. foreign relations

Your company expects to pay 5,000,000 Japanese yen 90 days from now. You decide to hedge your position by buying Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 90 days to be $.0099. How many dollars will you need to meet your obligation 90 days from now?

$47,500

Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. If the spot rate turns out to be $.0090 in 60 days, how many dollars will you receive for the 5,000,000 yen at that time?

$47,500

Your company will receive C$600,000 in 90 days. The 90-day forward rate for Canadian dollar is $.80. If you use a forward hedge, you will receive:

$480,000 in 90 days

c. GLOBEX

9. Currency options are commonly traded through the ____ system. a. robot b. Euro c. GLOBEX d. Scope

Assume the following information: You have $900,000 to invest: Current spot rate of Australian dollar (A$) = $.62 180-day forward rate of the Australian dollar = $.64 180-day interest rate in the United States = 3.5% 180-day interest rate in Australia = 3.0% If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days?

$56,903

Assume the following information regarding U.S. and European annualized interest rates: Numbers Trensor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days?

$579,845.

A MNC will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option: Exercise price = $.61 (1.0737) Premium = $.02 (0.025) Spot rate = $.60 (1.0561) Spot rate in 30 days = $.56 (.9857) 30-day forward rate = $.62 (1.0913)

$590,000

A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable in 6 months. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at maturity is $.85, what is the net amount received by the corporation if it acts rationally?

$84,000

A U.S. corporation has purchased currency call options to hedge a 62,500 British pounds payable in 3 months. The premium is $.02 per unit and the exercise price of the option is $1.50. If the spot rate of the pound at maturity is $1.65, what is the total amount paid by the corporation if it acts rationally?

$95,000

Assume that Parker Company will receive SF200,000 in 360 days. Assume the following interest rates: U.S. Switzerland 360-day borrowing rate 7% 5% 360-day deposit rate 6% 4% Assume the forward rate of the Swiss franc is $.50 and the spot rate of the Swiss franc is $.48. If Parker Company uses a money market hedge, it will receive ________ in 360 days.

$96,914

A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.02 per unit and the exercise price of the option is $.94. If the spot rate at the time of maturity is $.99, what is the net amount received by the corporation if it acts rationally?

$97,000

The forward rate of the Swiss franc is $.50. The spot rate of the Swiss franc is $.48. The following interest rates exist: U.S. Switzerland 360-day borrowing rate 7% 5% 360-day deposit rate 6% 4%You need to pay a sum of SF200,000 in 360 days. If you use a money market hedge, the amount of dollars you need in 360 days is:

$98,769

-$.02

114. A speculator sells a put option on Canadian dollars for a premium of $.03 per unit with an exercise price of $.98. The size of the option contact is C$50,000 and will not be exercised until expiration if at all. If the spot rate for Canadian dollar is $.90 on at expiration, the net profit or loss for the speculator is:

-$2500 Solution: Profit to speculator = 50,000[.03 +.90 - .98] = 50,000[-.05] = -$2500

a. contain a commitment to the owner, and are standardized.

. Currency futures contracts sold on an exchange: a. contain a commitment to the owner, and are standardized. b. contain a commitment to the owner, and can be tailored to the desire of the owner. c. contain a right but not a commitment to the owner, and can be tailored to the desire of the owner. d. contain a right but not a commitment to the owner, and are standardized.

b. contain a commitment to the owner, and can be tailored to the desire of the owner.

10. Forward contracts: a. contain a commitment to the owner, and are standardized. b. contain a commitment to the owner, and can be tailored to the desire of the owner. c. contain a right but not a commitment to the owner, and can be tailored to the desire of the owner. d. contain a right but not a commitment to the owner, and are standardized.

a. U.S. investors could possibly benefit from covered interest arbitrage.

10. If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate: a. U.S. investors could possibly benefit from covered interest arbitrage. b. British investors could possibly benefit from covered interest arbitrage. c. neither U.S. nor British investors could benefit from covered interest arbitrage. d. A and B

a. Weaken the dollar

10. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce unemployment. Which of the following is an appropriate action given this scenario? a. Weaken the dollar b. Strengthen the dollar c. Buy dollars with foreign currency in the foreign exchange market d. Implement a tight monetary policy

Assume the following information: Current spot rate (U$/N$) of New Zealand dollar+ $.41 (.8017) Forecast spot rate of New Zealand dollar in 1 year = $.43 (.8408) One year forward rate of the New Zealand dollar= $.42 (.8213) Annual interest rate on New Zealand dollars = 8% Annual interest rate on U.S. dollars= 9% Compute the return from covered interest arbitrage by a U.S. investor with $500,000 to invest.

10.63%

b. downward pressure on the euro's forward rate.

11. Assume that the U.S. investors are benefiting from covered interest arbitrage due to high interest rates on euros. Which of the following forces should result from the act of this covered interest arbitrage? a. downward pressure on the euro's spot rate. b. downward pressure on the euro's forward rate. c. downward pressure on the U.S. interest rate. d. upward pressure on the euro's interest rate.

b. Buy dollars with foreign currency

11. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce inflation. Which of the following is an appropriate action given this scenario? a. Sell dollars for foreign currency b. Buy dollars with foreign currency c. Lower interest rates d. None of the above

b. sell a futures contract on francs.

11. Which of the following is the most likely strategy for a U.S. firm that will be receiving 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.

Assume the following information: Spot rate today of Swiss franc = $.60 1-year forward rate as of today for Swiss franc = $.63 Expected spot rate 1 year from now = $.64 Rate on 1-year deposits denominated in Swiss francs = 7% Rate on 1-year deposits denominated in U.S. dollars = 9% From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____ percent.

12.35

Assume the following information: Spot rate today of Swiss franc ($/SF) = $.60 (1.0561) 1-year forward rate as of today for Swiss franc = $.63 (1.1089) Expected spot rate 1 year from now = $.64 (1.1265) Rate on 1-year deposits denominated in Swiss francs = 7% Rate on 1-year deposits denominated in U.S. dollars = 9% From the perspective of a U.S. investor with $1,000,000, covered interest arbitrage would yield a rate of return of ________.

12.35%

a. spot rate of peso increases; forward rate of peso decreases.

13. Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, 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 increases. c. spot rate of peso decreases; forward rate of peso decreases. d. spot rate of peso increases; forward rate of peso increases.

a. selling; selling

13. If your firm expects the euro to substantially depreciate, it could speculate by ____ euro call options or ____ euros forward in the forward exchange market. a. selling; selling b. selling; purchasing c. purchasing; purchasing d. purchasing; selling

b. sell; sell

13. To weaken the dollar using sterilized intervention, the Fed will ____ U.S. dollars and simultaneously ____ Treasury securities. a. buy; sell b. sell; sell c. sell; buy d. buy; sell

a. $15,385 RATIONALE: $1,000,000/$.325 = NZ$3,076,923 × $.33 = $1,015,385. Thus, the profit is $15,385.

14. Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with? a. $15,385 b. $15,625 c. $22,136 d. $31,250

a. $15,385.

d. put options; forward contracts

14. When you own ____, there is no obligation on your part; however, when you own ____, there is an obligation on your part. a. call options; put options b. futures contracts; call options c. forward contracts; futures contracts d. put options; forward contracts

d. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

16. Assume the following bid and ask rates of the pound for two banks as shown below: Bid Ask Bank A $1.41 $1.42 Bank B $1.39 $1.40 As locational arbitrage occurs: a. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will increase. b. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will decrease. c. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will decrease. d. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

a. $1,024,000.

16. Assume the following information: You have $1,000,000 to invest: Current spot rate of pound = $1.30 90-day forward rate of pound = $1.28 3-month deposit rate in U.S. = 3% 3-month deposit rate in Great Britain = 4% If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days? a. $1,024,000. b. $1,030,000. c. $1,040,000. d. $1,034,000. e. none of the above

d. less; wider

16. When currency options are not standardized and traded over-the-counter, there is ____ liquidity and a ____ bid/ask spread. a. less; narrower b. more; narrower c. more; wider d. less; wider

d. $36,400

160. A U.S. corporation has purchased currency call options to hedge a 70,000 pound (£) payable. The premium is $0.02 and the exercise price of the option is $0.50. If the spot rate at the time of maturity is $0.65, what is the total amount paid by the corporation if it acts rationally? a. $33,600 b. $46,900 c. $44,100 d. $36,400

c. $0.01

161. Andrea is an option speculator. She anticipates the Canadian dollar to depreciate from its current level of $0.90 to $0.85. Currently, Canadian dollar call options are available with an exercise price of $0.91 and a premium of $0.02. Also, Canadian dollar put options are available with an exercise price of $0.88 and a premium of $0.02. If the future spot rate of the Canadian dollar is $0.85, what is Andrea's profit or loss per unit? a. $0.03 b. $0.05 c. $0.01 d. $0.04

d. The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised.

162. Which of the following is not true regarding options? a. The buyer of a call option has the right to buy the currency at the strike price. b. The writer of a call option has the obligation to sell the currency to the buyer if the option if exercised. c. The buyer of a put option has the right to sell the currency at the strike price. d. The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised.

b. buying; selling; buying

163. If the observed put option premium is less than what is suggested by the put-call parity equation, astute arbitrageurs could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency. a. selling; buying; buying b. buying; selling; buying c. selling; buying; selling d. buying; buying; buying

d. U.S. investors will earn 10% whether they use covered interest arbitrage or invest in the U.S.

17. Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists, then: a. British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the U.S. b. U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the U.S. c. U.S. investors will earn 15% whether they use covered interest arbitrage or invest in the U.S. d. U.S. investors will earn 10% whether they use covered interest arbitrage or invest in the U.S.

b. 12.35 RATIONALE: $1,000,000/$.60 = SF1,666,667 × (1.07) = SF1,783,333 × $.63 = $1,123,500 Yield = ($1,123,500 − $1,000,000)/$1,000,000 = 12.35%

17. Assume the following information: Spot rate today of Swiss franc = $.60 1-year forward rate as of today for Swiss franc = $.63 Expected spot rate 1 year from now = $.64 Rate on 1-year deposits denominated in Swiss francs = 7% Rate on 1-year deposits denominated in U.S. dollars = 9% From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____ percent. a. 5.00 b. 12.35 c. 15.50 d. 14.13 e. 11.22

c. lower; lower

17. The shorter 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 equal. a. greater; greater b. greater; lower c. lower; lower d. lower; greater

b. −$1,562.50. The premium of the option is $.05 × (31,250 units) = $1,562.50. Since the option will not be exercised, the net profit is −$1,562.50.

18. Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. The highest net profit possible for the speculator based on the information above is: a. $1,562.50. b. −$1,562.50. c. −$1,250.00. d. −$625.00.

d. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate

18. Assume the following information for a bank quoting on spot exchange rates: Exchange rate of Singapore dollar in U.S $ = $.32 Exchange rate of pound in U.S.$ = $1.50 Exchange rate of pound in Singapore dollars = S$4.50 Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates? a. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate. b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate. c. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate. d. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate

b. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

18. Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered on U.S. dollars = 12% 1-year deposit rate offered on Singapore dollars = 10% 1-year forward rate of Singapore dollars = $.412 Spot rate of Singapore dollar = $.400 Given this information: a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. b. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. d. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

e. about 10.63

19. Assume the following information: Current spot rate of New Zealand dollar = $.41 Forecasted spot rate of New Zealand dollar 1 year from now = $.43 One-year forward rate of the New Zealand dollar = $.42 Annual interest rate on New Zealand dollars = 8% Annual interest rate on U.S. dollars = 9% Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%. a. about 11.97 b. about 9.63 c. about 11.12 d. about 11.64 e. about 10.63

e. about 5.59 RATIONALE: $500,000/$.64 = A$781,250 × (1.09) = A$851,563 × $.62 = $527,969 Yield = ($527,969 − $500,000)/$500,000 = 5.59%

19. Assume the following information: Current spot rate of Australian dollar = $.64 Forecasted spot rate of Australian dollar 1 year from now = $.59 1-year forward rate of Australian dollar = $.62 Annual interest rate for Australian dollar deposit = 9% Annual interest rate in the United States = 6% Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____percent. a. about 6.00 b. about 9.00 c. about 7.33 d. about 8.14 e. about 5.59

a. The futures market is primarily used by speculators while the forward market is primarily used for hedging.

19. Which of the following is true? a. The futures market is primarily used by speculators while the forward market is primarily used for hedging. b. The futures market is primarily used for hedging while the forward market is primarily used for speculating. c. The futures market and the forward market are primarily used for speculating. d. The futures market and the forward market are primarily used for hedging.

Assume that U.S. and British investors require a real return of 2 percent. If the nominal U.S. interest rate is 15 percent, and the nominal British rate is 13 percent, then according to the IFE, the British inflation rate is expected to be about ____ the U.S. inflation rate, and the British pound is expected to ____.

2 percentage points below; appreciate by about 2 percent

d. locational arbitrage

2. Due to ____, market forces should realign the spot rate of a currency among banks. a. forward realignment arbitrage b. triangular arbitrage c. covered interest arbitrage d. locational arbitrage

B. 220,000 SOLUTION: €200,000 × $1.10 = $220,000

2. Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of €200,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell €200,000 forward in three months. The spot rate of the euro on September 1 is $1.15. Graylon will receive $____ for the euros. a. 224,000 b. 220,000 c. 200,000 d. 230,000

d. decrease; increase; downward

2. If a country experiences high inflation relative to the United States, its exports to the United States should ____, its imports should ____, and there is ____ pressure on its currency's equilibrium value a. decrease; increase; upward b. decrease; decrease; upward c. increase; decrease; downward d. decrease; increase; downward e. increase; decrease; upward

d. $16,393 RATIONALE: $1,000,000/$.61 = A$1,639,344 × $.62 = $1,016,393. Thus, the profit is $16,393.

20. Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank V. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with? a. $10,003 b. $12,063 c. $14,441 d. $16,393 e. $18,219

d. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

20. Assume the following bid and ask rates of the pound for two banks as shown below: Bid Ask Bank A $1.41 $1.42 Bank B $1.39 $1.40 As locational arbitrage occurs: a. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will increase. b. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will decrease. c. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will decrease. d. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

d. none of the above

20. Which of the following is true? a. Most forward contracts between firms and banks are for speculative purposes. b. Most future contracts represent a conservative approach by firms to hedge foreign trade. c. The forward contracts offered by banks have maturities for only four possible dates in the future. d. none of the above

c. $15.43 RATIONALE: $10,000/$1.62 = £6,172.84 × 2.95 = NZ$18,209.88 × $.55 = $10,015.43. Thus, the profit is $15.43.

22. National Bank quotes the following for the British pound and the New Zealand dollar: Quoted Bid Price Quoted Ask Price Value of a British pound (£) in $ $1.61 $1.62 Value of a New Zealand dollar (NZ$) in $ $.55 $.56 Value of a British pound in New Zealand dollars NZ$2.95 NZ$2.96 Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy? a. $77.64 b. $197.53 c. $15.43 d. $111.80

Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of €200,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell €200,000 forward in three months. The spot rate of the euro on September 1 is $1.15. Graylon will receive $____ for the euros.

220,000

a. appreciate; depreciate

23. Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____. a. appreciate; depreciate b. depreciate; appreciate c. depreciate; depreciate d. appreciate; appreciate e. remain stable; appreciate

d. The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things equal.

23. Which of the following is correct? a. The longer the time to maturity, the less the value of a currency call option, other things equal. b. The longer the time to maturity, the less the value of a currency put option, other things equal. c. The higher the spot rate relative to the exercise price, the greater the value of a currency put option, other things equal. d. The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things equal.

b. 12.35

24. Assume the following information: Spot rate today of Swiss franc = $.60 1-year forward rate as of today for Swiss franc = $.63 Expected spot rate 1 year from now = $.64 Rate on 1-year deposits denominated in Swiss francs = 7% Rate on 1-year deposits denominated in U.S. dollars = 9% From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____%. a. 5.00 b. 12.35 c. 15.50 d. 14.13 e. 11.22

b. efficient after controlling for transaction costs.

24. Research has found that the options market is: a. efficient before controlling for transaction costs. b. efficient after controlling for transaction costs. c. highly inefficient. d. none of the above

c. be about the same as the 180-day forward rate.

25. Assume no transactions costs exist for any futures or forward contracts. The price of British pound futures with a settlement date 180 days from now will: a. definitely be above the 180-day forward rate. b. definitely be below the 180-day forward rate. c. be about the same as the 180-day forward rate. d. none of the above; there is no relation between the futures and forward prices.

d. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

25. Assume the following information for a bank quoting on spot exchange rates: Exchange rate of Singapore dollar in U.S. $ = $.32 Exchange rate of pound in U.S. $ = $1.50 Exchange rate of pound in Singapore dollars = S$4.50 Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates? a. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate. b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate. c. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate. d. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

c. put upward pressure on; put downward pressure on

26. Assume that a currency's spot and future prices are the same, and the currency's interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would ____ the currency's spot rate and ____ the currency's futures price. a. put upward pressure on; put upward pressure on b. put downward pressure on; put upward pressure on c. put upward pressure on; put downward pressure on d. put downward pressure on; put downward pressure on

d. .50.

26. Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the value of the Canadian dollar in pounds? a. 2.0. b. 2.40. c. .80. d. .50. e. none of the above

a. buying an identical futures contract.

27. 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. buying an identical futures contract. b. selling an identical futures contract. c. buying a futures contract with a different settlement date. d. selling a futures contract for a different amount of currency. e. purchasing a put option contract in the same currency.

e. None of the above

27. Assume that the euro's interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true? a. Americans using covered interest arbitrage earn the same rate of return as Germans who attempt covered interest arbitrage. b. Americans who invest in the U.S. earn the same rate of return as Germans who attempt covered interest arbitrage. c. Americans who invest in the U.S. earn the same rate of return as Germans who invest in Germany d. A and B e. None of the above

b. U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the U.S.

28. Assume the U.S. interest rate is 2% higher than the Swiss rate, and the forward rate of the Swiss franc has a 4% premium. Given this information: a. Swiss investors who attempt covered interest arbitrage earn the same rate of return as if they invested in Switzerland. b. U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the U.S. c. A and B d. none of the above

c. increase substantially

28. If the spot rate of the euro increased substantially over a one-month period, the futures price on euros would likely ____ over that same period. a. increase slightly b. decrease substantially c. increase substantially d. stay the same

d. buying franc call options.

29. A U.S. firm is bidding for a project needed by the Swiss government. The firm will not know if the bid is accepted until three months from now. The firm will need Swiss francs to cover expenses but will be paid by the Swiss government in dollars if it is hired for the project. The firm can best insulate itself against exchange rate exposure by: a. selling futures in francs. b. buying futures in francs. c. buying franc put options. d. buying franc call options.

c. upward; downward

29. Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts ____ pressure on the pound's spot rate, and ____ pressure on the pound's forward rate. a. downward; downward b. downward; upward c. upward; downward d. upward; upward

b. triangular arbitrage

3. Due to ____, market forces should realign the cross exchange rate between two foreign currencies based on the spot exchange rates of the two currencies against the U.S. dollar. a. forward realignment arbitrage b. triangular arbitrage c. covered interest arbitrage d. locational arbitrage

c. dollars; yen

3. If the Japanese yen is expected to appreciate against the U.S. dollar and interest rates in the United States and Japan are similar, banks may try speculating on this anticipated exchange rate movement by borrowing ____ and investing in ____. a. yen; dollars b. yen; yen c. dollars; yen d. dollars; dollars

b. discount; 1.8 (F/S) − 1 = ($1.60/$1.63) − 1 = −1.8 percent.

3. The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British pound is quoted at $1.63. The forward ____ is ____ percent. a. discount; 1.9 b. discount; 1.8 c. premium; 1.9 d. premium; 1.8

Assume that the interest rate offered on pounds is 5 percent and the pound is expected to depreciate by 1.5 percemt. For the international Fisher effect (IFE) to hold between the United Kingdom and the United States, the U.S. interest rate should be ____.

3.43 percent

d. $6,500,000. Dollars received from exercising option = NZ$12.5 million × $.55 = $6,875,000. Premium paid for options = NZ$12.5 million × $.03 = $375,000. Amount of dollars received minus premium = $6,500,000.

30. A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)? a. $6,875,000. b. $7,250,000. c. $7,000,000. d. $6,500,000. e. none of the above

d. premium; decrease

30. Assume that interest rate parity holds, and the euro's interest rate is 9% while the U.S. interest rate is 12%. Then the euro's interest rate increases to 11% while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro's forward ____ will ____ in order to maintain interest rate parity. a. discount; increase b. discount; decrease c. premium; increase d. premium; decrease

a. $7,067.

31. Assume the bid rate of a Swiss franc is $.57 while the ask rate is $.579 at Bank X. Assume the bid rate of the Swiss franc is $.560 while the ask rate is $.566 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with? a. $7,067. b. $8,556. c. $10,114. d. $12,238.

e. none of the above

31. If you purchase a straddle on euros, this implies that you: a. finance the purchase of a call option by selling a put option in the euros. b. finance the purchase of a call option by selling a call option in the euros. c. finance the purchase of a put option by selling a put option in the euros. d. finance the purchase of a put option by selling a call option in the euros. e. none of the above

a. $1,020,500.

32. Assume the following information: You have $1,000,000 to invest: Current spot rate of pound = $1.60 90-day forward rate of pound = $1.57 3-month deposit rate in U.S. = 3% 3-month deposit rate in U.K. = 4% If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days? a. $1,020,500. b. $1,045,600. c. $1,073,330. d. $1,094,230. e. $1,116,250.

e. none of the above Break-even point on put option to both the buyer and seller is $1.60 − $.03 = $1.57.

32. The premium on a pound put option is $.03 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. $1.63; $1.63 b. $1.63; $1.60 c. $1.63; $1.57 d. $1.57; $1.63 e. none of the above

b. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

33. Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered by U.S. banks = 12% 1-year deposit rate offered on Swiss francs = 10% 1-year forward rate of Swiss francs = $.62 Spot rate of Swiss franc = $.60 Given this information: a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. b. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. d. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

c. 50 percent. The net profit per unit is: $.87 − $.81 − $.04 = $.02. The net profit per unit as a percent of the initial investment per unit is: $.02/$.04 = 50%.

33. The existing spot rate of the Canadian dollar is $.82. The premium on a Canadian dollar call option is $.04. The exercise price is $.81. The option will be exercised on the expiration date if at all. If the spot rate on the expiration date is $.87, the profit as a percent of the initial investment (the premium paid) is: a. 0 percent. b. 25 percent. c. 50 percent. d. 150 percent. e. none of the above

e. about 5.59

34. Assume the following information: Current spot rate of Australian dollar = $.64 Forecasted spot rate of Australian dollar 1 year from now = $.59 1-year forward rate of Australian dollar = $.62 Annual interest rate for Australian dollar deposit = 9% Annual interest rate in the U.S. = 6% Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%. a. about 6.00 b. about 9.00 c. about 7.33 d. about 8.14 e. about 5.59

b. −$.02. Net profit per unit = $1.65 − $1.64 − $.03 = −$.02.

34. You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is: a. −$.03. b. −$.02. c. −$.01. d. $.02. e. none of the above

d. the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will increase.

35. Assume the following bid and ask rates of the pound for two banks as shown below: Bid Ask Bank C $1.61 $1.63 Bank D $1.58 $1.60 As locational arbitrage occurs: a. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will increase. b. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will decrease. c. the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will decrease. d. the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will increase.

e. none of the above Net profit per unit = $.61 − $.58 − $.02 = $.01.

35. You purchase a put option on Swiss francs for a premium of $.02, with an exercise price of $.61. The option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $.58, your net profit per unit is: a. −$.03. b. −$.02. c. −$.01. d. $.02. e. none of the above

d. $16,393.

36. Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank V. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with? a. $10,003. b. $12,063. c. $14,441. d. $16,393. e. $18,219.

c. $.01. Net profit per unit = $.64 + $.06 − $.69 = $.01.

36. You are a speculator who sells a call option on Swiss francs for a premium of $.06, with an exercise price of $.64. The option will not be exercised until the expiration date, if at all. If the spot rate of the Swiss franc is $.69 on the expiration date, your net profit per unit, assuming that you have to buy Swiss francs in the market to fulfill your obligation, is: a. −$.02. b. −$.01. c. $.01. d. $.02. e. none of the above

b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.

37. Assume the following information for a bank quoting on spot exchange rates: Exchange rate of Singapore dollar in U.S. $ = $.60 Exchange rate of pound in U.S. $ = $1.50 Exchange rate of pound in Singapore dollars = S$2.6 Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates? a. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate. b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate. c. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate. d. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

e. none of the above Net profit = $.78 + $.03 − $.86 = −$.05.

37. You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is: a. −$.08. b. −$.03. c. $.05. d. $.08. e. none of the above

d. $1,639.

38. Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage? a. $2,041,667. b. $9,804. c. $500. d. $1,639.

d. only on the expiration date; any time up to the expiration date

38. European currency options can be exercised ____; American currency options can be exercised ____. a. any time up to the expiration date; any time up to the expiration date b. any time up to the expiration date; only on the expiration date c. only on the expiration date; only on the expiration date d. only on the expiration date; any time up to the expiration date

d. sell futures contracts on yen

39. Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If it expects the yen to weaken, it could ____ to hedge the exchange rate risk on those exports. a. sell yen put options b. buy yen call options c. buy futures contracts on yen d. sell futures contracts on yen

c. buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand is $.20.

39. Which of the following is an example of triangular arbitrage initiation? a. buying a currency at one bank's ask and selling at another bank's bid, which is higher than the former bank's ask. b. buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand (SAR)/Singapore dollar (S$) exchange rate at SAR2.50 when the spot rate for the rand is $.20. c. buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand is $.20. d. converting funds to a foreign currency and investing the funds overseas.

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?

4 percent

If the interest rate on a deposit in the U.K. pound is 6% per year, and the pound is expected to depreciate against the U.S. dollar by 2%, what does the existence of interest rate parity imply about the interest rate on a deposit in U.S. dollar?

d. increase; upward

4. If a country experiences low inflation relative to the United States, its exports to the United States should ____, and there is ____ pressure on its currency's equilibrium value. a. decrease; downward b. decrease; upward c. increase; downward d. increase; upward

b. 6.04%; feasible

45. Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what is your percentage return after 180 days? Is covered interest arbitrage feasible in this situation? a. 7.96%; feasible b. 6.04%; feasible c. 6.04%; not feasible d. 4.07%; not feasible e. 10.00%; feasible

b. sell a euro futures contract; buy a futures contract after the euro has depreciated.

45. Which of the following would result in a profit of a euro futures contract when the euro depreciates? a. buy a euro futures contract; sell a futures contract after the euro has depreciated. b. sell a euro futures contract; buy a futures contract after the euro has depreciated. c. buy a euro futures contract; buy an additional futures contract after the euro has depreciated. d. none of the above would result in a profit when the euro depreciates.

d. the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.

46. According to interest rate parity (IRP): a. the forward rate differs from the spot rate by a sufficient amount to offset the inflation differential between two currencies. b. the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies. c. the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies. d. the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.

a. Options are traded on exchanges, never over-the-counter.

46. Which of the following is not true regarding options? a. Options are traded on exchanges, never over-the-counter. b. Similar to futures contracts, margin requirements are normally imposed on option traders. c. Although commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per contract. d. Currency options can be classified as either put or call options. e. All of the above are true.

b. $84,000. Dollars received from selling Canadian dollars in the spot market = C$100,000 × $.85 = $85,000. Premium paid for options = C$100,000 × $.01 = $1,000. Amount of dollars received less premium = $84,000.

47. A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received by the corporation if it acts rationally? a. $74,000. b. $84,000. c. $75,000. d. $85,000.

c. discount; increase

47. Assume that interest rate parity holds. The Mexican interest rate is 50%, and the U.S. interest rate is 8%. Subsequently, the U.S. interest rate decreases to 7%. According to interest rate parity, the peso's forward ____ will ____. a. premium; increase b. discount; decrease c. discount; increase d. premium; decrease

d. $36,400. Dollars paid when exercising the option = £70,000 × $.50 = $35,000. Premium paid for options = £70,000 × $.02 = $1,400. Amount of dollars paid = $35,000 + $1,400 = $36,400.

48. A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally? a. $33,600. b. $46,900. c. $44,100. d. $36,400.

b. yes; $0.01. The net profit per unit is: $.21 − $.18 − $.02 = $.01.

49. Frank is an option speculator. He anticipates the Danish kroner to appreciate from its current level of $.19 to $.21. Currently, kroner call options are available with an exercise price of $.18 and a premium of $.02. Should Frank attempt to buy this option? If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit? a. no; −$0.01. b. yes; $0.01. c. yes; −$0.01. d. yes; $0.03.

Assume that the U.S. one-year interest rate is 5 percent and the one-year interest rate on euros is 8 percent. You have $100,000 to invest and you believe that the international Fisher effect (IFE) holds. The euro's spot exchange rate is $1.40. What will be the yield on your investment if you invest in euros?

5 percent

b. One bank's bid price for a currency is greater than another bank's ask price for the currency.

5. In which case will locational arbitrage most likely be feasible? a. One bank's ask price for a currency is greater than another bank's bid price for the currency. b. One bank's bid price for a currency is greater than another bank's ask price for the currency. c. One bank's ask price for a currency is less than another bank's ask price for the currency. d. One bank's bid price for a currency is less than another bank's bid price for the currency.

c. convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today's forward rate.

5. Thornton, Inc. needs to invest five million Nepalese rupees in its Nepalese subsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction. Thus, Thornton would: a. convert the rupees to dollars in the spot market today and convert rupees to dollars in one year at today's forward rate. b. convert the dollars to rupees in the spot market today and convert dollars to rupees in one year at the prevailing spot rate. c. convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today's forward rate. d. convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at the prevailing spot rate.

Assume the following information: Current spot rate of Australian dollar = $.64 (.9650) Forecasted spot rate of Australian dollar 1 year from now = $.59 (.8896) 1-year forward rate of Australian dollar = $.62 (.9348) Annual interest rate for Australian dollar deposit = 9% Annual interest rate in U.S.= 6% Given the above information, the return from covered interest arbitrage by a U.S. investor with $500,000 to invest is: ________.

5.59%

a. −$0.01. The net profit per unit is $1.51 + $.02 − $1.54 = −$.01.

50. 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 $.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. $0.01. c. −$0.04. d. $0.04. e. −$0.03.

b. be paid; 20,000 Amount received per unit = $.022 − $.02 = $.002 × THB10,000,0000 = $20,000.

51. Johnson, Inc., a U.S.-based MNC, will need 10 million Thai baht on August 1. It is now May 1. Johnson has negotiated a non-deliverable forward contract with its bank. The reference rate is the baht's closing exchange rate (in $) quoted by Thailand's central bank in 90 days. The baht's spot rate today is $.02. If the rate quoted by Thailand's central bank on August 1 is $.022, Johnson will ____ $____. a. pay; 20,000 b. be paid; 20,000 c. pay; 2,000 d. be paid; 2,000 e. none of the above

b. buying; selling; buying

52. If the observed put option premium is less than what is suggested by the put-call parity equation, astute arbitrageurs could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency. a. selling; buying; buying b. buying; selling; buying c. selling; buying; selling d. buying; buying; buying

c. exercise and spot; exercise

53. A put option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a call option premium is the ____ price. a. spot and exercise; exercise b. spot and exercise; spot c. exercise and spot; exercise d. exercise and spot; spot

a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.

62. Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered by U.S. banks = 10% 1-year deposit rate offered on British pounds = 13.5% 1-year forward rate of Swiss francs = $1.26 Spot rate of Swiss franc = $1.30 Given this information: a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. b. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. d. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

b. Corporations who expect to buy foreign currency to finance foreign subsidiaries.

62. The purchase of a currency put option would be appropriate for which of the following? a. Investors who expect to buy a foreign bond in one month. b. Corporations who expect to buy foreign currency to finance foreign subsidiaries. c. Corporations who expect to collect on a foreign account receivable in one month. d. all of the above

d. A and C

63. If quoted exchange rates are the same across different locations, then ____ is not feasible. a. triangular arbitrage b. covered interest arbitrage c. locational arbitrage d. A and C

b. put buyer.

63. If you have bought the right to sell, you are a: a. call writer. b. put buyer. c. futures buyer. d. put writer.

c. a put buyer.

64. If you have a position where you might be obligated to buy Euros, you are: a. a call writer. b. a put writer. c. a put buyer. d. a futures seller.

c. covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets.

64. Points above the IRP line represent situations where: a. covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically. b. covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically. c. covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets. d. covered interest arbitrage is not feasible for neither domestic nor foreign investors.

b. covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically.

65. Points below the IRP line represent situations where: a. covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically. b. covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically. c. covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets. d. covered interest arbitrage is not feasible for neither domestic nor foreign investors.

d. none of the above

65. Which of the following is true for futures, but not for forwards? a. actual delivery. b. no transactions costs. c. self regulation. d. none of the above

d. all of the above.

66. Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist? a. transaction costs. b. political risk. c. differential tax laws. d. all of the above.

d. $47,500. ¥5,000,000 × $.0095/¥ = $47,500

66. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now? a. $44,500. b. $45,000. c. $526 million. d. $47,500.

b. premium; 2.73

67. Assume that interest rate parity holds. U.S. interest rate is 13% and British interest rate is 10%. The forward rate on British pounds exhibits a ____ of ____ percent. a. discount; 2.73 b. premium; 2.73 c. discount; 3.65 d. premium; 3.65

d. premium; 4.08 ($.59 − $.588)/$.588 × (360/30) = 4.08%

67. The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The forward rate contains an annualized ____ of ____%. a. discount; −4.07 b. premium; 4.07 c. discount; −4.08 d. premium; 4.08 e. premium; 3.40

c. 10%

68. Assume the following information: Exchange rate of Japanese yen in U.S. $ = $.011 Exchange rate of euro in U.S. $ = $1.40 Exchange rate of euro in Japanese yen = 140 yen What will be the yield for an investor who has $1,000,000 available to conduct triangular arbitrage? a. $100,000 b. −$90,909 c. 10% d. −9.09%

b. $2,368

69. Assume the following information: Quoted Bid Price Quoted Ask Price Value of an Australian dollar (A$) in $ $0.67 $0.69 Value of Mexican peso in $ $.074 $.077 Value of an Australian dollar in Mexican pesos 8.2 8.5 Assume you have $100,000 to conduct triangular arbitrage. What will be your profit from implementing this strategy? a. $6,133 b. $2,368 c. $6,518 d. $13,711

a. exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars.

7. If the Fed desires to weaken the dollar without affecting the dollar money supply, it should: a. exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars. b. exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars. c. exchange dollars for foreign currencies, and buy existing Treasury securities with dollars. d. exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.

The Smithsonian Agreement called for a devaluation of the U.S. dollar by about ____ percent.

According to the international Fisher effect, if U.S. investors expect a 5 percent rate of domestic inflation over one year and a 2 percent rate of inflation in European countries that use the euro, and if they require a 3 percent real return on investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be:

8 percent.

a. should exhibit a discount.

8. Assume that the interest rate in the home country of Currency X is a much higher interest rate 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 (i.e., it should equal its spot rate). d. B or C

c. exchanging dollars for foreign currency.

8. Which of the following is an example of direct intervention in foreign exchange markets? a. lowering interest rates. b. increasing the inflation rate. c. exchanging dollars for foreign currency. d. imposing barriers on international trade.

According to the Fisher Equation, if U.S. investors expect a 5% rate of domestic inflation over one year and require a 3% real return on investments over one year, the exact nominal interest rate on one-year U.S. treasury security would be:

8.15%

c. Transactional arbitrage

88. Which of the following is not mentioned in the text as a form of international arbitrage? a. Locational arbitrage b. Triangular arbitrage c. Transactional arbitrage d. Covered interest arbitrage e. All of the above are mentioned in the text as forms of international arbitrage.

d. $1,639

89. 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. $2,041,667 b. $9,804 c. $500 d. $1,639

b. British investors could possibly benefit from covered interest arbitrage.

9. If the interest rate is higher in the U.S. than in the United Kingdom, and if the forward rate of the British pound (in U.S. dollars) is the same as the pound's spot rate, then: a. U.S. investors could possibly benefit from covered interest arbitrage. b. British investors could possibly benefit from covered interest arbitrage. c. neither U.S. nor British investors could benefit from covered interest arbitrage. d. A and B

b. buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate.

90. 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. buying rupees from American Bank at the bid rate and selling them to National Bank at the ask rate. b. buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate. c. buying rupees from American Bank at the ask rate and selling to National Bank at the bid rate. d. buying rupees from National Bank at the bid rate and selling them to American Bank at the ask rate. e. Locational arbitrage is not possible in this case.

d. A and C

91. 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 rise and the other bank's bid price will fall. b. One bank's ask price will fall and the other bank's bid price will rise. c. One bank's bid/ask spread will widen and the other bank's bid/ask spread will fall. d. A and C

c. Buying Singapore dollars from a bank (quoted at $0.55) that has quoted the South African rand/Singapore dollar exchange rate at ZAR3.00 when the spot rate for the South African rand is $0.20.

92. Which of the following is an example of triangular arbitrage initiation? a. Buying a currency at one bank's ask and selling at another bank's bid, which is higher than the former bank's ask. b. Buying Singapore dollars from a bank (quoted at $0.55) that has quoted the South African rand (ZAR)/Singapore dollar (S$) exchange rate at ZAR2.50 when the spot rate for the South African rand is $0.20. c. Buying Singapore dollars from a bank (quoted at $0.55) that has quoted the South African rand/Singapore dollar exchange rate at ZAR3.00 when the spot rate for the South African rand is $0.20. d. Converting funds to a foreign currency and investing the funds overseas.

b. $5,030.45

93. 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. $5,030.45 c. $6,090.13 d. Triangular arbitrage is not possible in this case.

c. $15.43

94. National Bank quotes the following for the British pound and the New Zealand dollar: Quoted Bid Price Quoted Ask Price Value of a British pound (£) in $ $1.61 $1.62 Value of a New Zealand dollar (NZ$) in $ $0.55 $0.56 Value of a British pound in New Zealand dollars NZ$2.95 NZ$2.96 Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy? a. $77.64 b. $197.53 c. $15.43 d. $111.80

c. Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country.

95. Which of the following is not true regarding covered interest arbitrage? a. Covered interest arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount. b. Covered interest arbitrage involves investing in a foreign country and covering against exchange rate risk. c. Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country. d. If covered interest arbitrage is possible, you can guarantee a return on your funds that exceeds the returns you could achieve domestically.

e. All of the above are true.

96. Which of the following is not true regarding covered interest arbitrage? a. Covered interest arbitrage is a reason for observing interest rate parity (IRP). b. If the forward rate is equal to the spot rate, conducting covered interest arbitrage will yield a return that is exactly equal to the interest rate in the foreign country. c. When interest rate parity holds, covered interest arbitrage is not possible. d. When interest rate disparity exists, covered interest arbitrage may not be profitable. e. All of the above are true.

d. When covered interest arbitrage is not feasible, interest rate parity must hold.

97. Which of the following is not true regarding interest rate parity (IRP)? a. When interest rate parity holds, covered interest arbitrage is not possible. b. 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. c. 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. d. When covered interest arbitrage is not feasible, interest rate parity must hold. e. All of the above are true.

What are the advantages and disadvantages to a U.S. corporation that uses currency options on euros rather than a forward contract on euros to hedge its exposure in euros? Explain why an MNC use forward contracts to hedge committed transactions and use currency options to hedge contracts that are anticipated but not committed. Why might forward contracts be advantageous for committed transactions, and currency options be advantageous for anticipated transactions?

A currency option on euros allows more flexibility since it does not commit one to purchase or sell euros (as is the case with a euro futures or forward contract). Yet, it does allow the option holder to purchase or sell euros at a locked in price. The disadvantage of a euro option is that the option itself is not free. One must pay a premium for the call option, which is above and beyond the exercise price specified in the contract at which the euro could be purchased. An MNC may use forward contracts to hedge committed transactions because it would be cheaper to use a forward contract (a premium would be paid on an option contract that has an exercise price equal to the forward rate). The MNC may use currency options contracts to hedge anticipated transactions because it has more flexibility to let the contract go unexercised if the transaction does not occur.

D Dollars received from exercising option = NZ$12.5 million x $.55 = $6,875,000. Premium paid for options = NZ$12.5 million x $.03 = $375,000. Amount of dollars received minus premium = $6,500,000.

A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)? a. $6,875,000. b. $7,250,000. c. $7,000,000. d. $6,500,000. e. none of the above

A forward rate for a currency is said to exhibit a discount if a. the forward rate exceeds the existing spot rate. b. the forward rate is less than the existing spot rate. c. the forward rate exceeds the expected future spot rate. d. the forward rate is less than the expected future spot rate. e. none of the above

You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars should you expect to receive for your baht?

A$39.93

____ is not a factor that causes currency supply and demand schedules to change.

All of the above are factors that cause currency supply and demand schedules to change.

The ____ is also referred to as the "law of one price"

Absolute Purchasing Power Parity

An exporter is willing to send goods to the importer, on account, without a guaranteed payment by the bank. The bank provides a loan to the exporter that is backed by the value of the exported good. This reflects:

Accounts receivable financing

A I. Borrow €20 million. 2. Convert the E20 million to 620,000,000 x$1.13 = $22,600,000. 3. Invest the $22,600,000 at an annualized rate of 6.73% for 90 days. $22,600,000 x [1 + 6.73% (901360)] = $22,980,245 4. Determine euros owed: €20,000,000 x [1 + 7.28% (90/360)] = 620,364,000. 5. Determine dollars needed to repay euro loan: 620,364,000 x $1.10 = $22,400,400. 6. The dollar profit is $22,980,245 — $22,400,400 = $579,845.

Assume the following information regarding U.S. and European annualized interest rates: Currency Lending Rate: USD 6.73% ::::: EU 6.8% Borrowing Rate: USD 7.2% ::::: EU 7.28% Trensor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days? a. $579,845. b. $583,800. c. $588,200. d. $584,245. e. $980,245.

D Premium = (Forward rate - Spot rate)/Spot rate = ($.66 - $.62)/$.62 = 6.45%

Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. The forward rate exhibits a ____ of ____. a. premium; about 6% b. discount; about 6% c. discount; about 6.45% d. premium; about 6.45%

E I. Borrow $5 million. 2. Convert to NZ$: $5,000,0004.48 = NZ$10,416,667. 3. Invest the NZ$ at an annualized rate of 6.80% over five days. NZ$10,416,667 x [1 +6.80% (51360)] = NZ$ 10,426,505 4. Convert the NZ$ back to dollars: NZ$10,426,505 x $.50 = $5,213,252 5. Repay the dollars borrowed. The repayment amount is: $5,000,000 x [1 + 7.5%(5/360)] = $5,000,000 x [1.00104] = $5,005,208 6. After repaying the loan, the remaining dollar profit is: $5,213,252 —$5,005,208 = $208,044

Baylor Bank believes the New Zealand dollar will appreciate over the next five days from$.48 to $.50. The following annual interest rates apply: Currenncy LENDING RATE: USD 7.1% ::::: NZD 6.8% Borrowing Rate: USD 7.5% ::::: NZD 7.25% Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the five-day period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)? a. $521,325. b. $500,520. c. $104,262. d. $413,419. e. $208,044.

Assume no transactions costs exist for any futures or forward contracts. The price of British pound futures with a settlement date 180 days from now will:

Be about the same as the 180-day forward rate

In which case will locational arbitrage be most likely feasible? Bank A's:

Bid price for a currency is greater than Bank B's ask price for the currency

A ____ provides a summary of freight charges and conveys title to the merchandise

Bill of lading

Which of the following operations benefits from a continuing appreciation of a firm's local currency?

Borrowing immediately in a foreign currency and converting the funds to the local currency investment

Economic exposure can affect:

Both MNC and Purely domestic firms.

________ is not a determinant of transaction exposure.

Both c and d: The local (domestic/home) earnings of the MNC; The accounting methods (FASB rules) used

Who bears the payment risk in a letter of credit?

Both c and d: issuing bank; confirming bank

If the interest rate is higher in the United States than in the United Kingdom, and if the forward rate of the British pound (in U.S. dollars) is the same as the pound's spot rate, then:

British investors could possibly benefit from covered interest arbitrage.

Which of the following best describes currency options sold through an options exchange. They grant the buyer a right:

But not the obligation, to buy or sell and are standardized

It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce inflation. Which of the following is an appropriate action given this scenario?

Buy dollars with foreign currency

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:

Buying an identical futures contract

A U.S. firm is bidding for a project needed by the Swiss government. The firm will not know if the bid is accepted until three months from now. The firm will need Swiss francs to cover expenses but will be paid by the Swiss government in dollars if it is hired for the project. The firm can best insulate itself against exchange rate exposure by:

Buying franc call option

If you have acquired the right but not the obligation to buy, you are a

Call buyer/owner/holder

A The net profit per unit is $1.51 + $.02 - $1.54 = -$.01.

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 $.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. $0.01. c. ¬$0.04. d. $0.04. e. ¬$0.03.

Which of the following countries was probably the least affected (directly or indirectly) by the Asian crisis?

China.

The purchase of a Euro currency put option would be appropriate for a US company under which of the following?

Company expects to collect a Euro-denominated accounts receivable in six months

Which of the following is not a feature of the forward market?

Contracts usually reversed prior to maturity

An exchange of goods between two parties under two distinct contracts expressed in monetary terms are

Counter purchase

Due to ________, market forces should realign the relationship between the interest rate differential between two countries and the forward premium or discount on the exchange rate between their two currencies.

Covered interest arbitrage

If interest rate parity holds, then ____ is not feasible.

Covered interest arbitrage

Which of the following is not a form of exposure to exchange rate fluctuations?

Credit exposure/ transnational exposure/ interest rate exposure

Which of the following is not a feature of the futures market?

Credit risk borne by counterparties

d. contain a right but not a commitment to the owner, and are standardized.

Currency options sold through an options exchange: a. contain a commitment to the owner, and are standardized. b. contain a commitment to the owner, and can be tailored to the desire of the owner. c. contain a right but not a commitment to the owner, and can be tailored to the desire of the owner. d. contain a right but not a commitment to the owner, and are standardized.

Decline; Decline

Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal.

Decrease; U.S. dollar

Any event that reduces the U.S. demand for Japanese yen should result in a(n) ____ in the value of the Japanese yen with respect to ____, other things being equal.

Decrease; U.S. dollar

The Purchasing Power Parity (PPP) suggests that a home currency will:

Depreciate if home inflation rate exceeds foreign inflation rate.

The International Fisher Equation (IFE) suggests that a home currency will:

Depreciate if home interest rate exceeds foreign interest rate

Assume that the U.S. experiences a significant decline in income, while Japan's income remains steady. This event should place ____ pressure on the value of the Japanese yen, other things being equal. (Assume that interest rates and other factors are not affected.)

Downward

Assume that U.S. investors are benefiting from covered interest arbitrage due to high interest rate on euro. Which of the following adjustments should result from covered interest arbitrage?

Downward pressure on the euro's forward rate

Assume that the inflation rate becomes much higher in the U.K. relative to the U.S. This will place ____ pressure on the value of the British pound. Also, assume that interest rates in the U.K. begin to rise relative to interest rates in the U.S. The change in interest rates will place ____ pressure on the value of the British pound.

Downward; Upward

Assume that the Fisher Equation holds approximately for domestic and foreign countries. If real returns are equalized by arbitrage between countries, then differences in nominal interest rates between two countries:

Equal to inflation differentials between the two countries

The exchange rate mechanism (ERM) refers to the method of linking ____ currencies to each other within boundaries.

European

Assume that the interest rate for Currency X is much higher than the U.S. interest rate. According to Interest Rate Parity Theory, the forward rate of Currency X should:

Exhibit a discount

If an exporter sells his/her accounts receivables off to another firm that becomes responsible for obtaining payments from the various importers. This reflects:

Factoring

With _____, a bank purchases an exporter's receivables at a discount without recourse to the exporter:

Factoring

The exchange rates of smaller countries are very stable because the market for their currency is very liquid.

False

Investors from Germany, the United States, and the U.K. frequently invest in each other based on prevailing interest rates. If British interest rates increase, German investors are likely to buy ____ dollar-denominated securities, and the euro is likely to ____ relative to the dollar.

Fewer; Depreciate

Translation exposure reflects the exposure of a firm's

Financial statements to exchange rate fluctuations

A firm that sells products through ____ can reduce (used to be able to reduce) corporate taxes on income generated from foreign sales.

Foreign Sales Corporation (FSC)

An importer issues a promissory note to pay for the imported capital goods over a period of five years. The notes are extended to an exporter who sells them at a discount to a bank. This reflects:

Forfeiting

Any type of contractual arrangement calling for the delivery (and settlement) of a good or service at a future date at a price agreed upon at the initiation is a /an ________ contract.

Forward

If a contract contains a promise that a specified amount of foreign currency will be delivered on a specific date in the future at a specified price, the contract is a ____.

Forward contract

Forward contracts: a. contain a commitment to the owner, and are standardized. b. contain a commitment to the owner, and can be tailored to the desire of the owner. c. contain a right but not a commitment to the owner, and can be tailored to the desire of the owner. d. contain a right but not a commitment to the owner, and are standardized.

According to the Interest Rate Parity (IRP), which of the following is true?

Forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two countries.

Similar to the ________; __________ are agreements embodying obligation to buy or sell an asset or commodity for future delivery and settlement.

Forwards; futures

Unlike the ________; ___________ are traded on organized exchanges and are marked to the market.

Forwards; futures

The European Central Bank is located in:

Frankfurt.

Economic exposure reflects the exposure of a firm's

Future cash flows to exchange rate fluctuations

If a contract contains a promise that standardized units of foreign currency will be delivered on a specified date in the future, and at a specified price, the contract is a __________

Futures contract

Which of the following is not true regarding IRP, PPP, and the IFE?

IRP suggests that a currency's spot rate will change according to interest rate differentials.

Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?

If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will weaken.

If U.S. experiences a sudden surge in inflation and surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of Japanese yen will ____ against the U.S. dollar. a. appreciate b. depreciate c. remain unchanged d. cannot be determined from the information provided.

If inflation increases substantially in Australia while U.S. inflation remains unchanged, this is expected to place ____ pressure on the value of the Australian dollar with respect to the U.S. dollar. a. upward b. downward c. either upward or downward (depending on the degree of the increase in Australian inflation) d. none of the above; there will be no impact

If you have a position where you might be obligated to buy Euros, you are: a. a call writer. b. a put writer. c. a put buyer. d. a futures seller.

If you have bought the right to sell, you are a: a. call writer. b. put buyer. c. futures buyer. d. put writer.

If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction.

Illiquid; Highly sensitive

A call option on Australian dollars has a strike (exercise) price of $.76. The present exchange rate is $.79. This call option can be referred to as:

In the money

If the spot rate of the euro increased substantially over a one-month period, the futures price on euros would likely ____ over that same period.

Increase substantially

A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____.

Increase; Depreciate

Any event that increases the U.S. demand for euros should result in a(n) ____ in the value of the euro with respect to ____, other things being equal.

Increase; U.S. dollar

Any event that reduces the supply of Swiss francs to be exchanged for U.S. dollars should result in a(n) ____ in the value of the Swiss franc with respect to ____, other things being equal.

Increase; U.S. dollar

The following is not a technique used to eliminate transaction exposure by multinational firms

Index

The real interest rate adjusts the nominal interest rate for:

Inflation

The International Fisher Equation (IFE) states that:

Nominal interest rate differential between two countries is approximately equal to the rate of change in exchange rate between their currencies.

A firm produces goods for which substitute goods are produced in other countries. A depreciation of the firm's local currency should:

None of the above

A firm produces goods for which substitute goods are produced in other countries. An appreciation of the firm's local currency should:

None of the above

Derivatives are used in the following ways except

None of the above

Use the following information to calculate the dollar cost of using a money market hedge for a 200,000 pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the spot rate of the pound is $2.02, the 180-day forward rate is $2.00, the British borrowing/deposit interest rate is 5%, and the U.S. borrowing/deposit rate is 4% over the 180-day period.

None of the above

Which of the following is not true concerning regulation of derivatives in the US?

None of the above

You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is:

None of the above

You purchase a put option on Swiss francs for a premium of $.02, with an exercise price of $.61. The option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $.58, your net profit per unit is:

None of the above

Assume today that the U.S. five-year interest rate is 5% per year while the Mexican five-year rate is 8% per year. Assume also that the peso's five year forward rate is $.25. What is today's spot rate of the peso at which interest rate parity holds?

None of the above (.287)

If annualized nominal interest rates in the US and Switzerland are 12% and 8% respectively and the 90-day forward [one-year forward] rate for the Swiss franc is $1.0218, at what current spot rate for the Swiss frank will interest rate parity hold?

None of the above; answer is $1.0119

B 2-month forward rate = $.0087 x (1 - .03) = $.0084 Profit/loss from transaction = (100,000,000 x $.0084) - (100,000,000 x .009) = $60,000 loss.

On January 1st, Madison Co. ordered raw material from Japan and agreed to pay 100 million yen for this order on April 1st. It negotiated a 3-month forward contract to obtain 100 million Japanese yen on that date at $.009. On February 1st, the Japanese firm informed Madison Co. that it won't be able to fulfill that order. The Japanese yen spot rate on February 1st is $.0087 and 2-month forward rate exhibits 3% discount. To offset its existing contract Madison Co. will negotiate a forward contract to ____ for the date of April 1st and the profit/loss generated from this transaction is a ____ U.S. dollars. a. sell yen; gain of $60,000 b. sell yen; loss of $60,000 c. buy yen; gain of $30,000 d. to buy yen; loss of $30,000

In which case will locational arbitrage most likely be feasible?

One bank's bid price for a currency is greater than another bank's ask price for the currency.

Transaction exposure reflects the exposure of a firm's

Ongoing international transactions to exchange rate fluctuations

A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put option can be referred to as:

Out of the money

Because there are a variety of factors in addition to inflation that affect exchange rates, this will tend to:

Reduce the probability that PPP shall hold

An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale.

Reduce; Increase

Any restructuring of operations that ________ the difference between a foreign currency's inflows and outflows may ________ economic exposure.

Reduces, reduce

If you expect the euro to depreciate, it would be appropriate to ________ for speculative purposes. And what would you do if euro were expected to appreciate?

Sell a euro call and buy a euro put

Which of the following is the most likely strategy for a U.S. firm that will be receiving Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?

Sell a futures contract on francs.

To force the value of the pound to appreciate against the dollar, the Federal Reserve should:

Sell dollars for pound in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market.

A firm has 1,000,000 euro receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy for the firm is to:

Sell euros forward

Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If it expects the yen to weaken, it could ____ to hedge the exchange rate risk on those exports.

Sell futures contracts on yen

If your firm expects the euro to substantially depreciate, it could speculate by ____ euro call options or ____ euros forward in the forward exchange market.

Selling; selling

A bill of exchange requesting the bank to pay the fact amount upon presentation of a document is a

Sight draft

When should a speculator purchase a call option on Australian dollars? When should a speculator purchase a put option on Australian dollars?

Speculators should purchase a call option on Australian dollars if they expect the Australian dollar value to appreciate substantially over the period specified by the option contract. Speculators should purchase a put option on Australian dollars if they expect the Australian dollar value to depreciate substantially over the period specified by the option contract.

The phrase "the dollar was mixed in trading" means that:

The dollar strengthened against some currencies and weakened against others.

C The net profit per unit is: $.87 - $.81 - $.04 = $.02. The net profit per unit as a percent of the initial investment per unit is: $.02/$.04 = 50%.

The existing spot rate of the Canadian dollar is $.82. The premium on a Canadian dollar call option is $.04. The exercise price is $.81. The option will be exercised on the expiration date if at all. If the spot rate on the expiration date is $.87, the profit as a percent of the initial investment (the premium paid) is: a. 0 percent. b. 25 percent. c. 50 percent. d. 150 percent. e. none of the above

Which of the following is true?

The futures market is primarily used for speculating while the forward market is primarily used for hedging.

Which of the following is true?

The futures market is used for both hedging and speculating while the forward market is primarily used for hedging.

Which one is not a disadvantage of a freely floating exchange rate system?

The government may intervene to change the value of a given currency.

Which one of the following is a disadvantage of a fixed exchange rate system:

The government might change the value of the currency.

Under Purchasing Power Parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and

The inflation differential

___ is not a determinant of translation exposure.

The local (domestic) earnings of the MNC

Which of the following is correct about a currency option, other things equal?

The lower the exercises price relative to the spot rate, the greater the value of a call option (in the money call option)

The phrase "the dollar was mixed in trading" means that: a. the dollar was strong in some periods and weak in other periods over the last month. b. the volume of trading was very high in some periods and low in other periods. c. the dollar was involved in some currency transactions, but not others. d. the dollar strengthened against some currencies and weakened against others.

D Break-even point on call option to both the buyer and seller is $1.32 + $.02 = $1.34

The premium on a euro call option is $.02. The exercise price is $1.32. The break-even point is ____ for the buyer of the call, and ____ for the seller of the call. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.) a. $1.30; $1.30 b. $1.34; $1.30 c. $1.30; $1.34 d. $1.34; $1.34

According to the "law of one price,"

The price of an identical product should be equal across markets when measured in a common currency.

One year ago, you sold a put option on 100,000 euros with an expiration date of one year. You received a premium on the put option of $.04 per unit. The exercise price was $1.22. Assume that one year ago, the spot rate of the euro was $1.20, the one-year forward rate exhibited a discount of 2%, and the one-year futures price was the same as the one-year forward rate. From one year ago to today, the euro depreciated against the dollar by 4 percent. Today the put option will be exercised (if it is feasible for the buyer to do so). a. Determine the total dollar amount of your profit or loss from your position in the put option. b. Now assume that instead of taking a position in the put option one year ago, you sold a futures contract on 100,000 euros with a settlement date of one year. Determine the total dollar amount of your profit or loss.

The spot rate depreciated from $1.20 to $1.152. The loss on the put option per unit is $1.152 - $1.22 + $.04 = -$.028. Total loss = $.028 x 100,000 = $2,800. b. The forward rate one year ago was equal to: $1.20 x (1 - .02) = $1.176. So the futures rate is $1.176. The gain per unit is $1.176 - $1.152 = $.024 and the total gain is $.024 x 100,000 = $2,400.

D ($.59 - $.588)/$.588 x (360/30) = 4.08%

The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The forward rate contains an annualized ____ of ____%. a. discount; ¬4.07 b. premium; 4.07 c. discount; ¬4.08 d. premium; 4.08 e. premium; 3.40

B $1.29 x [1+ 0.10/(360/30)] = $1.30

The spot rate of euro is quoted at $1.29. The annualized forward premium on the euro is 10%. What is the 30-day forward rate of the euro? a. $1.28 b. $1.30 c. $1.42 d. $1.16

B $1.3 x(1 — .05)=$1.235

The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is the value of euro today? a. $1.365 b. $1.235 c. $1.330 d. $1.30

C ($0.73 — $0.69)/$0.69 = 5.80%

The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ____ by ____%. a. depreciated; 5.80 b. depreciated; 4.00 c. appreciated; 5.80 d. appreciated; 4.00

If interest rates on the euro are consistently below U.S. interest rates, then for the International Fisher Equation (IFE) to hold,

The value of the euro will appreciate against the dollar

A bill of exchange requesting the bank to pay the fact amount at a future date is a

Time draft

Which of the following is the most likely reason for revaluation of a currency?

To reduce inflation.

Which of the following is an appropriate form of indirect intervention?

To strengthen the dollar in the long run, the Fed attempts to reduce U.S. inflation.

When a currency call option is classified as "in the money," this indicates that a. the spot rate of the currency is less than the exercise price of the option. b. the spot rate of the currency is greater than the exercise price of the option. c. 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. d. 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.

When you own ____, there is no obligation on your part; however, when you own ____, there is an obligation on your part. a. call options; put options b. futures contracts; call options c. forward contracts; futures contracts d. put options; forward contracts

Which of the following events would most likely result in an appreciation of the U.S. dollar? a. U.S. inflation is very high. b. The Fed indicates that it will raise U.S. interest rates. c. Future U.S. interest rates are expected to decline. d. Japan is expected to increase interest rates in the near future.

Which of the following is not an instrument used by U.S.-based MNCs to cover their foreign currency positions? a. forward contracts. b. futures contracts. c. non-deliverable forward contracts. d. options. e. all of the above are instruments used to cover foreign currency positions.

Which of the following is not mentioned in the text as a factor affecting exchange rates? a. relative interest rates. b. relative inflation rates. c. government controls. d. expectations. e. all of the above are mentioned in the text as factors affecting exchange rates.

Which of the following is not true regarding options? a. Options are traded on exchanges, never over-the-counter. b. Similar to futures contracts, margin requirements are normally imposed on option traders. c. Although commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per contract. d. Currency options can be classified as either put or call options. e. All of the above are true.

Which of the following is not true regarding options? a. The buyer of a call option has the right to buy the currency at the strike price. b. The writer of a call option has the obligation to sell the currency to the buyer if the option if exercised. c. The buyer of a put option has the right to sell the currency at the strike price. d. The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised.

Which of the following is true for futures, but not for forwards? a. actual delivery. b. no transactions costs. c. self regulation. d. none of the above

Which of the following is true of options? a. The writer decides whether the option will be exercised. b. The writer pays the buyer the option premium. c. The buyer decides if the option will be exercised. d. More than one of these.

C Net profit per unit = $.64 + $.06 - $.69 = $.01.

You are a speculator who sells a call option on Swiss francs for a premium of $.06, with an exercise price of $.64. The option will not be exercised until the expiration date, if at all. If the spot rate of the Swiss franc is $.69 on the expiration date, your net profit per unit, assuming that you have to buy Swiss francs in the market to fulfill your obligation, is: a. ¬$.02. b. ¬$.01. c. $.01. d. $.02. e. none of the above

E Net profit per unit = $.61 - $.58 - $.02 = $.01.

11. Assume the following information regarding U.S. and European annualized interest rates: Currency Lending Rate Borrowing Rate U.S. Dollar ($) 6.73% 7.20% Euro (€) 6.80% 7.28% Trensor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days? a. $579,845. b. $583,800. c. $588,200. d. $584,245. e. $980,245.

a. $579,845. 1. Borrow €20 million. 2. Convert the €20 million to €20,000,000 ́ $1.13 = $22,600,000. 3. Invest the $22,600,000 at an annualized rate of 6.73% for 90 days. $22,600,000 ́ [1 + 6.73% (90/360)] = $22,980,245 4. Determine euros owed: €20,000,000 ́ [1 + 7.28% (90/360)] = €20,364,000. 5. Determine dollars needed to repay euro loan: €20,364,000 ́ $1.10 = $22,400,400. 6. The dollar profit is $22,980,245 $22,400,400 = $579,845.

58. The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.83: a. U.S. demand for Swiss francs would exceed the supply of francs for sale and there would be a shortage of francs in the foreign exchange market. b. U.S. demand for Swiss francs would be less than the supply of francs for sale and there would be a shortage of francs in the foreign exchange market. c. U.S. demand for Swiss francs would exceed the supply of francs for sale and there would be a surplus of francs in the foreign exchange market. d. U.S. demand for Swiss francs would be less than the supply of francs for sale and there would be a surplus of Swiss francs in the foreign exchange market.

a. U.S. demand for Swiss francs would exceed the supply of francs for sale and there would be a shortage of francs in the foreign exchange market.

Which of the following is not true regarding government intervention?

a. Under the direct method of intervention, an appreciation of the dollar would be accomplished by exchanging dollars for foreign currencies. b. Under nonsterilized intervention, the Fed would intervene in the foreign exchange market without adjusting the money supply. c. Under sterilized intervention, the Fed would intervene simultaneously in the foreign exchange and Treasury markets. d. Under indirect intervention, the Fed would attempt to affect the dollar's value by indirectly influencing the factors that determine it, such as interest rates.

16. If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be: a. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$. b. an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$. c. an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$. an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.

a. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.

Assume that the dollar has been consistently depreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using sterilized intervention. The Fed would

a. buy dollars with foreign currency and simultaneously sell Treasury securities for dollars. b. buy dollars with foreign currency and simultaneously buy Treasury securities with dollars. c. sell dollars for foreign currency and simultaneously sell Treasury securities for dollars. d. sell dollars for foreign currency and simultaneously buy Treasury securities with dollars.

Assume that the dollar has been consistently appreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using nonsterilized intervention. The Fed would

54. Assume that the total value of investment transactions between U.S. and Mexico is minimal. Also assume that total dollar value of trade transactions between these two countries is very large. Now assume that Mexico's inflation has suddenly increased, and Mexican interest rates have suddenly increased. Overall, this would put ____ pressure on the value of Mexican peso. The inflation effect should be ____ pronounced than the interest rate effect. a. downward; more b. upward; more c. downward; less d. upward; less

a. downward; more

6. Investors from Germany, the United States, and the U.K. frequently invest in each other based on prevailing interest rates. If British interest rates increase, German investors are likely to buy ____ dollardenominated securities, and the euro is likely to ____ relative to the dollar. a. fewer; depreciate b. fewer; appreciate c. more; depreciate d. more; appreciate

a. fewer; depreciate

23. Any event that increases the U.S. demand for euros should result in a(n) ____ in the value of the euro with respect to ____, other things being equal. a. increase; U.S. dollar b. increase; nondollar currencies c. decrease; nondollar currencies d. decrease; U.S. dollar

a. increase; U.S. dollar

26. Any event that reduces the supply of Swiss francs to be exchanged for U.S. dollars should result in a(n) ____ in the value of the Swiss franc with respect to ____, other things being equal. a. increase; U.S. dollar b. increase; nondollar currencies c. decrease; nondollar currencies d. decrease; U.S. dollar

a. increase; U.S. dollar

5. An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale. a. reduce; increase b. increase; reduce c. reduce; reduce d. increase; increase

a. reduce; increase

Among the reasons for government intervention are:

a. to smooth exchange rate movement. b. to establish implicit exchange rate boundaries. c. to respond to temporary disturbances.

62. Assume that U.S. inflation is expected to surge in the near future. The expectation of surge in inflation will most likely place ____ pressure on U.S. dollar immediately. a. upward b. downward c. no d. cannot be determined

a. upward

Assume the following information: Current spot rate of New Zealand dollar = $.41 Forecasted spot rate of New Zealand dollar 1 year from now = $.43 One-year forward rate of the New Zealand dollar = $.42 Annual interest rate on New Zealand dollars = 8% Annual interest rate on U.S. dollars = 9% Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____ percent.

about 10.63

Assume the following information: Current spot rate of Australian dollar = $.64 Forecasted spot rate of Australian dollar 1 year from now = $.59 1-year forward rate of Australian dollar = $.62 Annual interest rate for Australian dollar deposit = 9% Annual interest rate in the United States = 6% Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____percent.

about 5.59

Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?

all of the above

China's yuan is presently:

allowed to fluctuate but with central bank intervention.

57. British investors frequently invest in the U.S. or Italy, depending on the prevailing interest rates. If Italian interest rates suddenly rise high above U.S. rates, the investors will ____ the supply of pounds to be exchanged for dollars and thus put ____ pressure on the value of the pound against the U.S. dollar. a. increase; downward b. decrease; upward c. increase; upward d. decrease; downward

b. decrease; upward

18. If inflation increases substantially in Australia while U.S. inflation remains unchanged, this is expected to place ____ pressure on the value of the Australian dollar with respect to the U.S. dollar. a. upward b. downward c. either upward or downward (depending on the degree of the increase in Australian inflation) d. none of the above; there will be no impact

b. downward

27. Assume that the U.S. experiences a significant decline in income, while Japan's income remains steady. This event should place ____ pressure on the value of the Japanese yen, other things being equal. (Assume that interest rates and other factors are not affected.) a. upward b. downward c. no d. upward and downward (offsetting)

b. downward

4. A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____. a. increase; appreciate b. increase; depreciate c. decrease; depreciate d. decrease; appreciate

b. increase; depreciate

To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously ____ Treasury securities.

buy; buy

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:

buying an identical futures contract.

72. Which of the following interactions will likely have the least effect on the dollar's value? Assume everything else is held constant. a. A reduction in U.S. inflation accompanied by an increase in real U.S. interest rates b. A reduction in U.S. inflation accompanied by an increase in nominal U.S. interest rates c. An increase in U.S. inflation accompanied by an increase in nominal, but not real, U.S. interest rates d. An increase in Singapore's inflation accompanied by an increase in real U.S. interest rates e. An increase in Singapore's interest rates accompanied by an increase in U.S. inflation.

c. An increase in U.S. inflation accompanied by an increase in nominal, but not real, U.S. interest rates

19. Assume that British corporations begin to purchase more supplies from the U.S. as a result of several labor strikes by British suppliers. This action reflects: a. an increased demand for British pounds. b. a decrease in the demand for British pounds. c. an increase in the supply of British pounds for sale. d. a decrease in the supply of British pounds for sale.

c. an increase in the supply of British pounds for sale.

53. If the Fed announces that it will decrease the U.S. interest rates, and European Central Bank takes no action, then the value of euro will ____ against the value of U.S. dollar. The Fed's action is called ____ intervention. a. appreciate; direct b. depreciate; direct c. appreciate; indirect d. depreciate; indirect

c. appreciate; indirect

1. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ____ by ____%. a. depreciated; 5.80 b. depreciated; 4.00 c. appreciated; 5.80 d. appreciated; 4.00

c. appreciated; 5.80

22. Assume that the U.S. places a strict quota on goods imported from Chile and that Chile does not retaliate. Holding other factors constant, this event should immediately cause the U.S. demand for Chilean pesos to ____ and the value of the peso to ____. a. increase; increase b. increase; decline c. decline; decline d. decline; increase

c. decline; decline

30. Assume that Japan places a strict quota on goods imported from the U.S. and the U.S. places a strict quota on goods imported from Japan. This event should immediately cause the U.S. demand for Japanese yen to ____, and the supply of Japanese yen to be exchanged for U.S. dollars to ____. a. increase; increase b. increase; decline c. decline; decline d. decline; increase

c. decline; decline

56. If the Japanese yen is expected to appreciate against the U.S. dollar and interest rates in the U.S. and Japan are similar, banks may try speculating on this anticipated exchange rate movement by borrowing ____ and investing in ____. a. yen; dollars b. yen; yen c. dollars; yen d. dollars; dollars

c. dollars; yen

8. Assume that the inflation rate becomes much higher in the U.K. relative to the U.S. This will place ____ pressure on the value of the British pound. Also, assume that interest rates in the U.K. begin to rise relative to interest rates in the U.S. The change in interest rates will place ____ pressure on the value of the British pound. a. upward; downward b. upward; upward c. downward; upward d. downward; downward

c. downward; upward

33. If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to purchase its securities should ____, the outflow of its funds to purchase U.S. securities should ____, and there is ____ pressure on its currency's equilibrium value. a. increase; decrease; downward b. decrease; increase; upward c. increase; decrease; upward d. decrease; increase; downward e. increase; increase; upward

c. increase; decrease; upward

74. If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to purchase its securities should ____, the outflow of its funds to purchase U.S. securities should ____, and there is ____ pressure on its currency's equilibrium value. a. increase; decrease; downward b. decrease; increase; upward c. increase; decrease; upward d. decrease; increase; downward e. increase; increase; upward

c. increase; decrease; upward

14. The real interest rate adjusts the nominal interest rate for: a. exchange rate movements. b. income growth. c. inflation. d. government controls. e. none of the above

c. inflation

48. If a currency's spot market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction. a. liquid; highly sensitive b. illiquid; insensitive c. liquid; insensitive d. none of the above

c. liquid; insensitive

69. Illiquid currencies tend to exhibit ____ volatile exchange rate movements, as the equilibrium prices of their currencies adjust to ____ changes in supply and demand conditions. a. less; even minor b. less; only large c. more; even minor d. more; only large e. none of the above

c. more; even minor

60. Assume that the British government eliminates all controls on imports by British companies. Other things being equal, the U.S. demand for pounds would ____, the supply of pounds for sale would ____, and the equilibrium value of the pound would ____. a. increase; increase; increase b. decrease; increase; decrease c. remain unchanged; increase; decrease d. remain unchanged; increase; increase

c. remain unchanged; increase; decrease

13. Assume that Swiss investors have francs available to invest in securities, and they initially view U.S. and British interest rates as equally attractive. Now assume that U.S. interest rates increase while British interest rates stay the same. This would likely cause: a. the Swiss demand for dollars to decrease and the dollar will depreciate against the pound. b. the Swiss demand for dollars to increase and the dollar will depreciate against the Swiss franc. c. the Swiss demand for dollars to increase and the dollar will appreciate against the Swiss franc. d. the Swiss demand for dollars to decrease and the dollar will appreciate against the pound.

c. the Swiss demand for dollars to increase and the dollar will appreciate against the Swiss franc.

28. News of a potential surge in U.S. inflation and zero Chilean inflation places ____ pressure on the value of the Chilean peso. The pressure will occur ____. a. upward; only after the U.S. inflation surges b. downward; only after the U.S. inflation surges c. upward; immediately d. downward; immediately

c. upward; immediately

15. If U.S. inflation suddenly increased while European inflation stayed the same, there would be: a. an increased U.S. demand for euros and an increased supply of euros for sale. b. a decreased U.S. demand for euros and an increased supply of euros for sale. c. a decreased U.S. demand for euros and a decreased supply of euros for sale. d. an increased U.S. demand for euros and a decreased supply of euros for sale.

d. an increased U.S. demand for euros and a decreased supply of euros for sale.

55. If U.S. experiences a sudden surge in inflation and surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of Japanese yen will ____ against the U.S. dollar. a. appreciate b. depreciate c. remain unchanged d. cannot be determined from the information provided.

d. cannot be determined from the information provided.

29. Assume that Canada places a strict quota on goods imported from the U.S. and that the U.S. does not retaliate. Holding other factors constant, this event should immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to ____ and the value of the Canadian dollar to ____. a. increase; increase b. increase; decline c. decline; decline d. decline; increase

d. decline; increase

24. Any event that reduces the U.S. demand for Japanese yen should result in a(n) ____ in the value of the Japanese yen with respect to ____, other things being equal. a. increase; U.S. dollar b. increase; nondollar currencies c. decrease; nondollar currencies d. decrease; U.S. dollar

d. decrease; U.S. dollar

25. Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal. a. increase; U.S. dollar b. increase; nondollar currencies c. decrease; nondollar currencies d. decrease; U.S. dollar

d. decrease; U.S. dollar

32. If a country experiences high inflation relative to the U.S., its exports to the U.S. should ____, its imports should ____, and there is ____ pressure on its currency's equilibrium value. a. decrease; increase; upward b. decrease; decrease; upward c. increase; decrease; downward d. decrease; increase; downward e. increase; decrease; upward

d. decrease; increase; downward

73. If a country experiences high inflation relative to the U.S., its exports to the U.S. should ____, its imports should ____, and there is ____ pressure on its currency's equilibrium value. a. decrease; increase; upward b. decrease; decrease; upward c. increase; decrease; downward d. decrease; increase; downward e. increase; decrease; upward

d. decrease; increase; downward

52. Assume that the income levels in U.K. start to rise, while U.S. income levels remain unchanged. This will place ____ pressure on the value of British pound. Also, assume that U.S. interest rates rise, while the British pound remains unchanged. This will place ____ pressure on the value of British pound. a. downward; downward b. upward; downward c. upward; upward d. downward; upward

d. downward; upward

17. If the U.S. and Japan engage in substantial financial flows but little trade, ____ directly influences their exchange rate the most. If the U.S. and Switzerland engage in much trade but little financial flows, ____ directly influences their exchange rate the most. a. interest rate differentials; interest rate differentials b. inflation and interest rate differentials; interest rate differentials c. income and interest rate differentials; inflation differentials d. interest rate differentials; inflation and income differentials e. inflation and income differentials; interest rate differentials

d. interest rate differentials; inflation and income differentials

21. The phrase "the dollar was mixed in trading" means that: a. the dollar was strong in some periods and weak in other periods over the last month. b. the volume of trading was very high in some periods and low in other periods. c. the dollar was involved in some currency transactions, but not others. d. the dollar strengthened against some currencies and weakened against others.

d. the dollar strengthened against some currencies and weakened against others.

7. When the "real" interest rate is relatively low in a given country, then the currency of that country is typically expected to be: a. weak, since the country's quoted interest rate would be high relative to the inflation rate. b. strong, since the country's quoted interest rate would be low relative to the inflation rate. c. strong, since the country's quoted interest rate would be high relative to the inflation rate. d. weak, since the country's quoted interest rate would be low relative to the inflation rate.

d. weak, since the country's quoted interest rate would be low relative to the inflation rate.

If the Fed desires to weaken the dollar without affecting the dollar money supply, it should:

exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars.

If the Fed desires to strengthen the dollar without affecting the dollar money supply, it should:

exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.

Which of the following is an example of direct intervention in foreign exchange markets?

exchanging dollars for foreign currency.

During the period 1944-1971, the U.S. used a ____ system

fixed

During the period 1944-1971, the U.S. used a ____ system.

fixed

Consider two countries that trade with each other, called X and Y. According to the text, inflation in Country X will have a greater impact on inflation in Country Y under the ____ system. Now, consider two other countries that trade with each other, called A and B. Unemployment in Country A will have a greater impact on unemployment in Country B under the ____ system.

fixed rate; fixed rate

A "dirty" float represents a system of:

floating exchange rates, but the central bank can manipulate the currency.

floating rate; floating rate

The euro is the currency:

none of the above

Assume a central bank exchanges its currency for other foreign currencies in the foreign exchange market, but does not adjust for the resulting change in the money supply. This is an example of:

nonsterilized intervention.

The risk-free interest rates among countries that have adopted the euro should:

not necessarily be similar to risk-free rates in other countries.

European currency options can be exercised ____; American currency options can be exercised ____.

only on the expiration date; any time up to the expiration date

Assume that interest rate parity holds, and the euro's interest rate is 9 percent while the U.S. interest rate is 12 percent. Then the euro's interest rate increases to 11 percent while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro's forward ____ will ____ in order to maintain interest rate parity.

premium; decrease

If a speculator expects that the Fed will intervene by exchanging euros for U.S. dollars, she would most likely ____ to capitalize on this intervention.

purchase euro put options

If a speculator expects that the Fed will intervene by exchanging dollars for Japanese yen, she would most likely ____ to capitalize on this intervention.

purchase yen call options

Assume that a currency's spot and future prices are the same, and the currency's interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would ____ the currency's spot rate and ____ the currency's futures price.

put upward pressure on; put downward pressure on

Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from this covered interest arbitrage activity?

upward pressure on the Swiss franc's forward rate

Assume that Japan and the United States frequently trade with each other. Under the freely floating exchange rate system, high inflation in the U.S. will place ____ pressure on Japanese yen, ____ the amount of Japanese yen available for sale, and result in ____ inflation in Japan.

upward; reduce; unchanged

A weaker dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which places ____ pressure on U.S. bond prices.

upward; upward; downward

Under a managed float exchange rate system, the Fed may attempt to stimulate the U.S. economy by ____ the dollar. Such an adjustment in the dollar's value should ____ the U.S. demand for products produced by major foreign countries.

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