busfin 3250 midterm 2

The current spot exchange rate is $1.55 = €1.00; the three-month U.S. dollar interest rate is 2%. Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00. What is the least that this option should sell for? A. $0.05 × 62,500 = $3,125 B. $3,125/1.02 = $3,063.73 C. $0.00 D. none of the above

A. $0.05 × 62,500 = $3,125

A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. The one-year interest rate in the U.S. is i$ = 2% and in the euro zone the one-year interest rate is i€ = 6%. The one-year forward exchange rate is $1.20 = €1.00; what must the spot rate be to eliminate arbitrage opportunities? A. $1.2471 = €1.00 B. $1.20 = €1.00 C. $1.1547 = €1.00 D. none of the above

A. $1.2471 = €1.00

Yesterday, you entered into a futures contract to buy €62,500 at $1.50/€. Your initial margin was $3,750 (= 0.04 × €62,500 × $1.50/€ = 4 percent of the contract value in dollars). Your maintenance margin is $2,000 (meaning that your broker leaves you alone until your account balance falls to $2,000). At what settle price (use 4 decimal places) do you get a margin call? A. $1.4720/€ B. $1.5280/€ C. $1.500/€ D. None of the above

A. $1.4720/€

A Japanese EXPORTER has a €1,000,000 receivable due in one year. Estimate the cost today of an options strategy that will eliminate exchange rate risk. A. $20,000 B. $5,000 C. $12,500 D. None of the above

A. $20,000

Suppose that the one-year interest rate is 3.0 percent in the Italy, the spot exchange rate is $1.20/€, and the one-year forward exchange rate is $1.18/€. What must one-year interest rate be in the United States? A. 1.2833% B. 1.0128% C. 4.75% D. None of the above

A. 1.2833%

. Suppose that you are the treasurer of IBM with an extra U.S. $1,000,000 to invest for six months. You are considering the purchase of U.S. T-bills that yield 1.810% (that's a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. What must the interest rate in Japan (on an investment of comparable risk) be before you are willing to consider investing there for six months? A. 11.991% B. 1.12% C. 7.45% D. -7.45%

A. 11.991%

It is common practice among currency traders worldwide to both price and trade currencies against the U.S. dollar. In fact, 2007 BIS statistics indicate that about ______ percent of currency trading in the world involves the U.S. dollar on one side of the transaction. A. 86 percent B. 75 percent C. 45 percent D. 15 percent

A. 86 percent

Consider the graph of a call option shown at right. The option is a three-month American call option on €62,500 with a strike price of $1.50 = €1.00 and an option premium of $3,125. What are the values of A, B, and C, respectively? A. A = -$3,125 (or -$.05 depending on your scale); B = $1.50; C = $1.55 B. A = -€3,750 (or -€.06 depending on your scale); B = $1.50; C = $1.55 C. A = -$.05; B = $1.55; C = $1.60 D. none of the above

A. A = -$3,125 (or -$.05 depending on your scale); B = $1.50; C = $1.55

Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter invoiced in euros, at a cost of €512,100. The U.S. importer will contact his U.S. bank (where of course he has an account denominated in U.S. dollars) and inquire about the exchange rate, which the bank quotes as €1.0242/$1.00. The importer accepts this price, so his bank will ____________ the importer's account in the amount of ____________. A. Debit; $500,000 B. Credit; €512,100 C. Credit; $500,000 D. Debit; €512,100

A. Debit; $500,000

In which market does a clearinghouse serve as a third party to all transactions? A. Futures B. Forwards C. Swaps D. None of the above

A. Futures

What paradigm is used to define the futures price? A. IRP B. Hedge Ratio C. Black Scholes D. Risk Neutral Valuation

A. IRP

Three days ago, you entered into a futures contract to sell €62,500 at $1.50 per €. Over the past three days the contract has settled at $1.50, $1.52, and $1.54. How much have you made or lost? A. Lost $0.04 per € or $2,500 B. Made $0.04 per € or $2,500 C. Lost $0.06 per € or $3,750 D. None of the above

A. Lost $0.04 per € or $2,500

The foreign exchange market closes A. Never. B. 4:00 p.m. EST (New York time). C. 4:00 p.m. GMT (London time). D. 4:00 p.m. (Tokyo time).

A. Never.

The Fisher effect can be written for the United States as: A. Option A B. Option B C. Option C D. Option D

A. Option A

As of today, the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward rate that should prevail? A. €1.00 = $1.2379 B. €1.00 = $1.2623 C. €1.00 = $0.9903 D. $1.00 = €1.2623

A. €1.00 = $1.2379

Suppose you observe the following exchange rates: €1 = $1.50; £1 = $2.00. Calculate the euro-pound exchange rate. A. €1.3333 = £1.00 B. £1.3333 = €1.00 C. €3.00 = £1 D. €1.25 = £1.00

A. €1.3333 = £1.00

Which of the lines is a graph of the profit at maturity of writing a call option on €62,500 with a strike price of $1.20 = €1.00 and an option premium of $3,125? A. A B. B C. C D. D

B

Today's settlement price on a Chicago Mercantile Exchange (CME) Yen futures contract is $0.8011/¥100. Your margin account currently has a balance of $2,000. The next three days' settlement prices are $0.8057/¥100, $0.7996/¥100, and $0.7985/¥100. (The contractual size of one CME Yen contract is ¥12,500,000). If you have a long position in one futures contract, the changes in the margin account from daily marking-to-market, will result in the balance of the margin account after the third day to be A. $1,425. B. $1,675. C. $2,000. D. $3,425.

B. $1,675.

Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and the one-year forward exchange rate is $1.16/€. What must the spot exchange rate be? A. $1.1768/€ B. $1.1434/€ C. $1.12/€ D. None of the above

B. $1.1434/€

Consider a bank dealer who faces the following spot rates and interest rates. What should he set his 1-year forward bid price at? A. $1.4324/€ B. $1.4358/€ C. $1.4662/€ D. $1.4676/€

B. $1.4358/€

Suppose you observe a spot exchange rate of $1.50/€. If interest rates are 5% APR in the U.S. and 3% APR in the euro zone, what is the no-arbitrage 1-year forward rate? A. €1.5291/$ B. $1.5291/€ C. €1.4714/$ D. $1.4714/€

B. $1.5291/€

The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00. Consider a three-month American call option on €62,500. For this option to be considered at-the-money, the strike price must be A. $1.60 = €1.00 B. $1.55 = €1.00 C. $1.55 × (1 + i$)3/12 = €1.00 × (1 + i€)3/12 D. none of the above

B. $1.55 = €1.00

Using the table shown, what is the most current spot exchange rate shown for British pounds? Use a direct quote from a U.S. perspective. A. $1.61 = £1.00 B. $1.60 = £1.00 C. $1.00 = £0.625 D. $1.72 = £1.00

B. $1.60 = £1.00

If the annual inflation rate is 2.5 percent in the United States and 4 percent in the U.K., and the dollar appreciated against the pound by 1.5 percent, then the real exchange rate, assuming that PPP initially held, is _____. A. parity B. 0.9710 C. -0.0198 D. 4.5

B. 0.9710

Suppose that the one-year interest rate is 4.0 percent in the Italy, the spot exchange rate is $1.60/€, and the one-year forward exchange rate is $1.58/€. What must one-year interest rate be in the United States? A. 2% B. 2.7% C. 5.32% D. None of the above

B. 2.7%

Which of the following is correct? A. European options can be exercised early. B. American options can be exercised early. C. Asian options can be exercised early. D. All of the above

B. American options can be exercised early.

Generally unfavorable evidence on PPP suggests that A. substantial barriers to international commodity arbitrage exist. B. tariffs and quotas imposed on international trade can explain at least some of the evidence. C. shipping costs can make it difficult to directly compare commodity prices. D. all of the above

D. all of the above

If you could accurately and consistently forecast exchange rates A. this would be a very handy thing as girls prefer guys with skills. B. you could impress your dates. C. you could make a great deal of money. D. all of the above

D. all of the above

The euro-pound cross exchange rate can be computed as: A. S(€/£) = S($/£) × S(€/$) B. C. D. all of the above

D. all of the above

. In the event of a default on one side of a futures trade, A. the clearing member stands in for the defaulting party. B. the clearing member will seek restitution for the defaulting party. C. if the default is on the short side, a randomly selected long contract will not get paid. That party will then have standing to initiate a civil suit against the defaulting short. D. both a and b

D. both a and b

Although IRP tends to hold, it may not hold precisely all the time A. due to transactions costs, like the bid ask spread. B. due to asymmetric information. C. due to capital controls imposed by governments. D. both a and c

D. both a and c

An exporter can share exchange rate risk with their customers by A. invoicing in their customer's local currency. B. splitting the difference, and invoicing half of sales in local currency and half of sales in home currency. C. invoicing sales in a currency basket such as the SDR as the invoice currency. D. both b and c

D. both b and c

With regard to fundamental forecasting versus technical forecasting of exchange rates A. the technicians tend to use "cause and effect" models. B. the fundamentalists tend to believe that "history will repeat itself" is the best model. C. both a and b D. none of the above

D. none of the above

An exporter faced with exposure to an appreciating currency can reduce transaction exposure with a strategy of A. paying or collecting early. B. paying or collecting late. C. paying late, collecting early. D. paying early, collecting late

D. paying early, collecting late

What is the ASK cross-exchange rate for Swiss Francs priced in euro? Hint: Find the price that a currency dealer will take in euro to sell Swiss francs. A. €0.5386/CHF B. €0.5389/CHF C. €0.5463/CHF D. €0.5466/CHF

D. €0.5466/CHF

Your firm is an Italian exporter of bicycles. You have sold an order to a Swiss firm for SFr. 2,000,000 worth of bicycles. Payment from the customer (in Swiss francs) is due in 12 months. Use a money market hedge to redenominate this one-year franc denominated receivable into a euro-denominated receivable with a one-year maturity. The following were computed without rounding. Select the answer closest to yours. A. €1,116,826.92 B. €1,250,000 C. €1,134,122.29 D. €1,156,804.73

D. €1,156,804.73

Your firm is an Italian importer of bicycles. You have placed an order with a Swiss firm for SFr. 2,000,000 worth of bicycles. Payment (in francs) is due in 12 months. Use a money market hedge to redenominate this one-year franc denominated payable into a euro-denominated payable with a one-year maturity. The following were computed without rounding. Select the answer closest to yours. A. €1,116,826.92 B. €1,250,000 C. €1,134,122.29 D. €1,156,804.73

D. €1,156,804.73

Using the table what is the 6-month forward pound-yen cross-exchange rate?

.005euro/1yen

Using the table, what is 3-month forward premium or discount (expressed as an annual percentage rate) for the British pound in terms of U.S. dollars?

.28%

. Suppose you observe the following exchange rates: €1 = $1.25; £1 = $2.00. Calculate the euro-pound exchange rate. A. €1 = £1.60 B. €1 = £0.625 C. €2.50 = £1 D. €1 = £2.50

A. €1 = £1.60

Using the table, what is the Canadian dollar-euro spot cross-exchange rate?

1.3846

Which equation is used to define the futures price?

A

ABC Inc., an exporting firm, expects to earn $20 million if the dollar depreciates, but only $10 million if the dollar appreciates. Assume that the dollar has an equal chance of appreciating or depreciating. Step one: calculate the expected tax of ABC if it is operating in a foreign country that has progressive corporate taxes as shown below: Corporate income tax rate = 15% for the first $7,500,000. Corporate income tax rate = 30% for earnings exceeding $7,500,000. Step two: ABC is considering implementing a hedging program that will eliminate their exchange rate risk: they will make a certain $15 million whether or not the dollar appreciates or depreciates. How much will they save in taxes if they implement the program? A. $0 B. $3,375,000 C. $1,500,000 D. $4,500,000

A. $0

The current exchange rate is €1.25 = £1.00 and a British firm offers a French customer the choice of paying a £10,000 bill due in 90 days with either £10,000 or €12,500. A. The seller has given the buyer an at-the-money put option on euro with a strike in pounds. B. The seller has given the buyer an at-the-money put option on pounds with a strike in euro. C. The seller has given the buyer an at-the-money call option on euro with a strike in pounds. D. None of the above

A. The seller has given the buyer an at-the-money put option on euro with a strike in pounds.

Which of the following is a true statement? A. While researchers found it difficult to reject the random walk hypothesis for exchange rates on empirical grounds, there is no theoretical reason why exchange rates should follow a pure random walk. B. While researchers found it easy to reject the random walk hypothesis for exchange rates on empirical grounds, there are strong theoretical reasons why exchange rates should follow a pure random walk. C. While researchers found it difficult to reject the random walk hypothesis for exchange rates on empirical grounds, there are compelling theoretical reasons why exchange rates should follow a pure random walk. D. None of the above

A. While researchers found it difficult to reject the random walk hypothesis for exchange rates on empirical grounds, there is no theoretical reason why exchange rates should follow a pure random walk.

Exercise of a currency futures option results in A. a long futures position for the call buyer or put writer. B. a short futures position for the call buyer or put writer. C. a long futures position for the put buyer or call writer. D. a short futures position for the call buyer or put buyer.

A. a long futures position for the call buyer or put writer.

Forward parity states that A. any forward premium or discount is equal to the expected change in the exchange rate. B. any forward premium or discount is equal to the actual change in the exchange rate. C. the nominal interest rate differential reflects the expected change in the exchange rate. D. an increase (decrease) in the expected inflation rate in a country will cause a proportionate increase (decrease) in the interest rate in the country.

A. any forward premium or discount is equal to the expected change in the exchange rate.

. A MNC seeking to reduce transaction exposure with a strategy of leading and lagging A. can probably employ the strategy more effectively with intra firm payables and receivables than with customers or outside suppliers. B. can employ the strategy most easily with customers, regardless of market structure. C. can employ the strategy most easily with suppliers, regardless of market structure. D. none of the above

A. can probably employ the strategy more effectively with intra firm payables and receivables than with customers or outside suppliers

The choice between a forward market hedge and a money market hedge often comes down to A. interest rate parity. B. option pricing. C. flexibility and availability. D. none of the above

A. interest rate parity.

An exporter can shift exchange rate risk to their customers by A. invoicing in their home currency. B. invoicing in their customer's local currency. C. splitting the difference, and invoicing half of sales in local currency and half of sales in home currency. D. invoicing sales in a currency basket such as the SDR as the invoice currency.

A. invoicing in their home currency.

The spot market A. involves the almost-immediate purchase or sale of foreign exchange. B. involves the sale of futures, forwards, and options on foreign exchange. C. takes place only on the floor of a physical exchange. D. all of the above.

A. involves the almost-immediate purchase or sale of foreign exchange.

If a foreign county experiences a hyperinflation, A. its currency will depreciate against stable currencies. B. its currency may appreciate against stable currencies. C. its currency may be unaffected—it's difficult to say. D. none of the above

A. its currency will depreciate against stable currencies.

A dealer in pounds who thinks that the exchange rate is about to increase in volatility A. may want to widen his bid-ask spread. B. may want to decrease his bid-ask spread. C. may want to lower his ask price. D. none of the above.

A. may want to widen his bid-ask spread.

Contingent exposure can best be hedged with A. options. B. money market hedging. C. futures. D. all of the above

A. options.

A study of Fortune 500 firms hedging practices shows that A. over 90 percent of Fortune 500 firms use forward contracts. B. over 90 percent of Fortune 500 firms use options contracts. C. both a and b D. none of the above

A. over 90 percent of Fortune 500 firms use forward contracts

Most interbank trades are A. speculative or arbitrage transactions. B. simple order processing for the retail client. C. overnight loans from one bank to another. D. brokered by dealers.

A. speculative or arbitrage transactions.

The random walk hypothesis suggests that A. the best predictor of the future exchange rate is the current exchange rate. B. the best predictor of the future exchange rate is the current forward rate. C. both a and b are consistent with the efficient market hypothesis. D. None of the above

A. the best predictor of the future exchange rate is the current exchange rate.

A 5-year swap contract can be viewed as a portfolio of 5 forward contracts with maturities of 1, 2, 3, 4 and 5 years. One important exception is that A. the forward price is the same for the swap contract but not for the forward contracts. B. the swap contract will have daily resettlement. C. the forward contracts will have resettlement risk. D. none of the above.

A. the forward price is the same for the swap contract but not for the forward contracts.

Exchange rate risk of a foreign currency payable is an example of A. transaction exposure. B. translation exposure. C. economic exposure. D. none of the above

A. transaction exposure.

Suppose you observe the following exchange rates: €1 = $1.50; ¥120 = $1.00. Calculate the euro-pound exchange rate. A. ¥133.33 = €1.00 B. €1.00 = ¥180 C. ¥80 = €1.00 D. €1 = £2.50

A. ¥133.33 = €1.00

Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollaryen exchange rate is quoted at $1.00 = ¥120. A. ¥192/€1.00 B. €1.92/¥100 C. €1.25/¥1.00 D. €1.00/¥1.92

A. ¥192/€1.00

Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the one-year forward exchange rate, is $1.16/€. Assume that an arbitrageur can borrow up to $1,000,000. A. This is an example where interest rate parity holds. B. This is an example of an arbitrage opportunity; interest rate parity does NOT hold. C. This is an example of a Purchasing Power Parity violation and an arbitrage opportunity. D. None of the above

B. This is an example of an arbitrage opportunity; interest rate parity does NOT hold.

An "option" is A. a contract giving the seller (writer) of the option the right, but not the obligation, to buy (call) or sell (put) a given quantity of an asset at a specified price at some time in the future. B. a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (call) or sell (put) a given quantity of an asset at a specified price at some time in the future. C. a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (put) or sell (call) a given quantity of an asset at a specified price at some time in the future. D. a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (put) or sell (sell) a given quantity of an asset at a specified price at some time in the future.

B. a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (call) or sell (put) a given quantity of an asset at a specified price at some time in the future.

The most direct and popular way of hedging transaction exposure is by A. exchange-traded futures options. B. currency forward contracts. C. foreign currency warrants. D. borrowing and lending in the domestic and foreign money markets

B. currency forward contracts.

The Efficient Markets Hypothesis states A. markets tend to evolve to low transactions costs and speedy execution of orders. B. current asset prices (e.g. exchange rates) fully reflect all the available and relevant information. C. current exchange rates cannot be explained by such fundamental forces as money supplies, inflation rates and so forth. D. none of the above

B. current asset prices (e.g. exchange rates) fully reflect all the available and relevant information.

The Bid price A. is the price that the dealer has just paid for something, his historical cost of the most recent trade. B. is the price that a dealer stands ready to pay. C. refers only to auctions like eBay, not over the counter transactions with dealers. D. is the price that a dealer stands ready to sell at.

B. is the price that a dealer stands ready to pay.

Covered Interest Arbitrage (CIA) activities will result in A. an unstable international financial markets. B. restoring equilibrium prices quickly. C. a disintermediation. D. no effect on the market.

B. restoring equilibrium prices quickly.

If the exchange rate follows a random walk A. the future exchange rate is unpredictable. B. the future exchange rate is expected to be the same as the current exchange rate, St = E(St + 1). C. the best predictor of future exchange rates is the forward rate Ft = E(St + 1|It). D. both b and c

B. the future exchange rate is expected to be the same as the current exchange rate, St = E(St + 1).

A CFO should be least worried about A. transaction exposure. B. translation exposure. C. economic exposure. D. none of the above

B. translation exposure.

Consider a bank dealer who faces the following spot rates and interest rates. What should he set his 1-year forward ask price at? A. $1.4324/€ B. $1.4358/€ C. $1.4662/€ D. $1.4676/€

C. $1.4662/€

An investor believes that the price of a stock, say IBM's shares, will increase in the next 60 days. If the investor is correct, which combination of the following investment strategies will show a profit in all the choices? (i) - buy the stock and hold it for 60 days (ii) - buy a put option (iii) - sell (write) a call option (iv) - buy a call option (v) - sell (write) a put option A. (i), (ii), and (iii) B. (i), (ii), and (iv) C. (i), (iv), and (v) D. (ii) and (iii)

C. (i), (iv), and (v)

In conversation, interbank foreign exchange traders use a shorthand abbreviation in expressing spot currency quotations. Consider a $/£ bid-ask quote of $1.9072-$1.9077. The "big figure", assumed to be known to all traders is _____. A. 1.9077 B. 1 C. 1.90 D. 77

C. 1.90

. Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€. What must one-year interest rate be in the euro zone to avoid arbitrage? A. 5.0% B. 6.09% C. 8.62% D. None of the above

C. 8.62%

The current exchange rate is €1.25 = £1.00 and a British firm offers a French customer the choice of paying a £10,000 bill due in 90 days with either £10,000 or €12,500. A. The seller has given the buyer an at-the-money put option. B. The seller has given the buyer an at-the-money call option. C. Both a and b are correct D. None of the above

C. Both a and b are correct

Which of the follow options strategies are consistent in their belief about the future behavior of the underlying asset price? A. Selling calls and selling puts B. Buying calls and buying puts C. Buying calls and selling puts D. None of the above

C. Buying calls and selling puts

Your firm is a U.K.-based importer of bicycles. You have placed an order with an Italian firm for €1,000,000 worth of bicycles. Payment (in euro) is due in 12 months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how many contracts of what type and maturity. A. Go short 100 12-month euro futures contracts; and short 80 12-month pound futures contracts. B. Go long 100 12-month euro futures contracts; and long 80 12-month pound futures contracts. C. Go long 100 12-month euro futures contracts; and short 80 12-month pound futures contracts. D. Go short 100 12-month euro futures contracts; and long 80 12-month pound futures contracts. E. None of the above

C. Go long 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.

The world's largest foreign exchange trading center is A. New York. B. Tokyo. C. London. D. Hong Kong.

C. London.

Yesterday, you entered into a futures contract to buy €62,500 at $1.50 per €. Suppose the futures price closes today at $1.46. How much have you made/lost? A. Depends on your margin balance. B. You have made $2,500.00. C. You have lost $2,500.00. D. You have neither made nor lost money, yet.

C. You have lost $2,500.00.

Intervention in the foreign exchange market is the process of A. a central bank requiring the commercial banks of that country to trade at a set price level. B. commercial banks in different countries coordinating efforts in order to stabilize one or more currencies. C. a central bank buying or selling its currency in order to influence its value. D. the government of a country prohibiting transactions in one or more currencies.

C. a central bank buying or selling its currency in order to influence its value.

Spot foreign exchange trading A. accounts for about 5 percent of all foreign exchange trading. B. accounts for about 20 percent of all foreign exchange trading. C. accounts for about 33 percent of all foreign exchange trading. D. accounts for about 70 percent of all foreign exchange trading.

C. accounts for about 33 percent of all foreign exchange trading.

. The benefit to forecasting exchange rates A. are greatest during periods of fixed exchange rates. B. are nonexistent now that the euro and dollar are the biggest game in town. C. accrue to, and are a vital concern for, MNCs formulating international sourcing, production, financing and marketing strategies. D. all of the above

C. accrue to, and are a vital concern for, MNCs formulating international sourcing, production, financing and marketing strategies.

Interest Rate Parity (IRP) is best defined as A. when a government brings its domestic interest rate in line with other major financial markets. B. when the central bank of a country brings its domestic interest rate in line with its major trading partners. C. an arbitrage condition that must hold when international financial markets are in equilibrium. D. None of the above

C. an arbitrage condition that must hold when international financial markets are in equilibrium.

In view of the fact that PPP is the manifestation of the law of one price applied to a standard commodity basket, A. it will hold only if the prices of the constituent commodities are equalized across countries in a given currency. B. it will hold only if the composition of the consumption basket is the same across countries. C. both a and b D. none of the above

C. both a and b

If you think that the dollar is going to appreciate against the euro, you should A. buy put options on the euro. B. sell call options on the euro. C. buy call options on the euro. D. none of the above

C. buy call options on the euro.

Most exchange traded currency options A. mature every month, with daily resettlement. B. have original maturities of 1, 2, and 3 years. C. have original maturities of 3, 6, 9, and 12 months. D. mature every month, without daily resettlement.

C. have original maturities of 3, 6, 9, and 12 months.

At the wholesale level A. most trading takes place OTC between individuals on the floor of the exchange. B. most trading takes place over the phone. C. most trading flows over Reuters and EBS platforms. D. most trading flows through specialized "broking" firms.

C. most trading flows over Reuters and EBS platforms.

An exporter faced with exposure to a depreciating currency can reduce transaction exposure with a strategy of A. paying or collecting early. B. paying or collecting late. C. paying late, collecting early. D. paying early, collecting late.

C. paying late, collecting early

An arbitrage is best defined as A. a legal condition imposed by the CFTC. B. the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making reasonable profits. C. the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making guaranteed profits. D. None of the above

C. the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making guaranteed profits.

When Interest Rate Parity (IRP) does not hold A. there is usually a high degree of inflation in at least one country. B. the financial markets are in equilibrium. C. there are opportunities for covered interest arbitrage. D. both b and c

C. there are opportunities for covered interest arbitrage.

Suppose that the current exchange rate is £1.00 = $2.00. The indirect quote, from the U.S. perspective is A. £1.00 = $2.00. B. £1.00 = $0.50. C. £0.50 = $1.00. D. None of the above

C. £0.50 = $1.00.

Using the table above, what is the bid price of euro in terms of pounds? A. €1.3371/£ B. €1.3378/£ C. £0.7475/€ D. £0.7479/€

C. £0.7475/€

If the $/€ bid and ask prices are $1.50/€ and $1.51/€, respectively, the corresponding €/$ bid and ask prices are A. €0.6667 and €0.6623. B. $1.51 and $1.50. C. €0.6623 and €0.6667. D. cannot be determined with the information given.

C. €0.6623 and €0.6667.

As of today, the spot exchange rate is €1.00 = $1.60 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward rate that should prevail? A. €1.00 = $1.6157 B. €1.6157 = $1.00 C. €1.00 = $1.5845 D. $1.00 × 1.03 = €1.60 × 1.02

C. €1.00 = $1.5845

Suppose you observe a spot exchange rate of $1.50/€. If interest rates are 3% APR in the U.S. and 5% APR in the euro zone, what is the no-arbitrage 1-year forward rate? A. €1.5291/$ B. $1.5291/€ C. €1.4714/$ D. $1.4714/€

D. $1.4714/€

Suppose you observe a spot exchange rate of $2.00/£. If interest rates are 5% APR in the U.S. and 2% APR in the U.K., what is the no-arbitrage 1-year forward rate? A. £2.0588/$ B. $2.0588/£ C. £1.9429/$ D. $1.9429/£

D. $1.9429/£

Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate, with oneyear maturity, is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000. If an astute trader finds an arbitrage, what is the net cash flow in one year? A. $10,690 B. $15,000 C. $46,207 D. $21,964.29

D. $21,964.29

Suppose the spot ask exchange rate, Sa($|£), is $1.90 = £1.00 and the spot bid exchange rate, Sb($|£), is $1.89 = £1.00. If you were to buy $10,000,000 worth of British pounds and then sell them five minutes later, how much of your $10,000,000 would be "eaten" by the bid-ask spread? A. $1,000,000 B. $52,910.05 C. $100,000 D. $52,631.58

D. $52,631.58

Suppose that the annual interest rate is 2.0 percent in the United States and 4 percent in Germany, and that the spot exchange rate is $1.60/€ and the forward exchange rate, with oneyear maturity, is $1.58/€. Assume that an arbitrager can borrow up to $1,000,000 or €625,000. If an astute trader finds an arbitrage, what is the net cash flow in one year? A. $238.65 B. $14,000 C. $46,207 D. $7,000

D. $7,000

A currency futures option amounts to a derivative on a derivative. Why would something like that exist? A. For some assets, the futures contract can have lower transactions costs and greater liquidity than the underlying asset. B. Tax consequences matter as well, and for some users an option contract on a future is more tax efficient. C. Transactions costs and liquidity. D. All of the above

D. All of the above

Which of the following issues are difficulties for the fundamental approach to exchange rate forecasting? A. One has to forecast a set of independent variables to forecast the exchange rates. Forecasting the former will certainly be subject to errors and may not be necessarily easier than forecasting the latter. B. The parameter values, that is the α's and β's, that are estimated using historical data may change over time because of changes in government policies and/or the underlying structure of the economy. Either difficulty can diminish the accuracy of forecasts even if the model is correct. C. The model itself can be wrong. D. All of the above

D. All of the above

There is an intimate relationship between a country's BCA and how the country finances its domestic investment and pays for government expenditures. This relationship is given by BCA ≡ X - M ≡ (S - I) + (T - G). Given this, which of the following is a true statement? A. If (S - I) < 0, it implies that a country's domestic savings is insufficient to finance domestic investment. B. If (T - G) < 0, it implies that a country's tax revenue is insufficient to finance government spending. C. When BCA is negative, it implies that government budget deficits an/or part of domestic investment are being finance with foreign-controlled capital. D. All of the above are true

D. All of the above are true

Suppose a bank customer wishes to trade out of British pounds and into Swiss francs. A. In dealer jargon, this is a currency against currency trade. B. The bank will frequently handle such a trade by selling British pounds for U.S. dollars and then buying Swiss francs with U.S. dollars. C. The bank would typically sell the British pounds directly for Swiss francs. D. Both a and b

D. Both a and b

If you own a foreign currency denominated bond, you can hedge with A. a long position in a currency forward contract. B. a long position in an exchange-traded futures option. C. buying the foreign currency today and investing it in the foreign county. D. a swap contract where pay the cash flows of the bond in exchange for dollars.

D. a swap contract where pay the cash flows of the bond in exchange for dollars.

Buying a currency option provides A. a flexible hedge against exchange exposure. B. limits the downside risk while preserving the upside potential. C. a right, but not an obligation, to buy or sell a currency. D. all of the above

D. all of the above

The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A's correspondent account(s) with Bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at Bank B for $90,000 using its correspondent relationship with Bank B. A. Bank A's dollar-denominated account at B will fall by $90,000. B. Bank B's dollar-denominated account at A will rise by $90,000. C. Bank A's pound-denominated account at B will rise by £45,000. D. Bank B's pound-denominated account at A will fall by £45,000. E. All of the above are correct

E. All of the above are correct