International Finance FMGT 2242 Quiz 8/9, FINANCE TEST REVIEW 22222
12) Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. Jasper should ________ at ________ to profit from changing currency values. A) buy yen; the forward rate B) buy dollars; the forward rate C) sell yen; the forward rate D) There is not enough information to answer this question.
A
19) The maximum gain for the purchaser of a call option contract is ________ while the maximum loss is ________. A) unlimited; the premium paid. B) the premium paid; unlimited. C) unlimited; unlimited. D) unlimited; the value of the underlying asset.
A
2) A foreign currency ________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, place, and price. A) futures B) forward C) option D) swap
A
2) A foreign currency ________ option gives the holder the right to ________ a foreign currency, whereas a foreign currency ________ option gives the holder the right to ________ an option. A) call, buy, put, sell B) call, sell, put, buy C) put, hold, call, release D) none of the above
A
7) A call option whose exercise price is less than the spot price is said to be: A) in-the-money. B) at-the-money. C) out-of-the-money. D) under-the-spot.
A
7) Option premiums deteriorate at an/a ________ as they approach expiration. A) increasing rate B) proportional C) decreasing rate D) less than proportional rate
A
8) Peter Simpson thinks that the U.K. pound will cost $1.43/£ in six months. A 6-month currency futures contract is available today at a rate of $1.44/£. If Peter was to speculate in the currency futures market, and his expectations are correct, which of the following strategies would earn him a profit? A) Sell a pound currency futures contract. B) Buy a pound currency futures contract. C) Sell pounds today. D) Sell pounds in six months.
A
9) Jack Hemmings bought a 3-month British pound futures contract for $1.4400/£ only to see the dollar appreciate to a value of $1.4250 at which time he sold the pound futures. If each pound futures contract is for an amount of £62,500, how much money did Jack gain or lose from his speculation with pound futures? A) $937.50 loss B) $937.50 gain C) £937.50 loss D) £937.50 gain
A
April 19, 2009, British Pound Option Prices (cents per pound, 62,500 pound contracts). 11) Refer to Table 7.1. What was the closing price of the British pound on April 18, 2009? A) $1.448/£ B) £1.448/$ C) $14.48/£ D) none of the above Answer: A
A
16) When the Russian Ruble reached the limits of the bands about its managed float targets (Ru5.70/$ to Ru6.35/$) in 1997, the Russian government would intervene in the markets to stabilize the Ruble. If the exchange rate approached Ru5.70/$ the government would ________ Rubles using foreign exchange and gold, or if the exchange rate approached Ru6.35/$ they would ________ Rubles. A) buy; sell B) sell; buy C) buy; buy D) sell; sell
Answer: B Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Conceptual
8) The authors did not identify which of the following as a root of the Asian currency crisis? A) the collapse of some Asian currencies. B) the rate of inflation in the United States. C) corporate socialism. D) banking stability and management.
Answer: B Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Conceptual
3) "Overshooting" exchange rate changes in response to an action of the Federal Reserve would be an example of A) a market inefficiency. B) a market efficiency. C) the Fisher Effect. D) none of the above.
Answer: A Diff: 1 Topic: 8.2 Currency Market Intervention Skill: Recognition
6) A country's Central Bank may have the policy to A) fight inflation. B) fight slow economic growth. C) either A or B D) none of the above
Answer: A Diff: 1 Topic: 8.2 Currency Market Intervention Skill: Recognition
7) The Central Bank practice of the active buying and selling of the domestic currency against foreign currencies is the process of A) direct intervention. B) indirect intervention. C) coordinated intervention. D) capital controls.
Answer: A Diff: 1 Topic: 8.2 Currency Market Intervention Skill: Recognition
11) The principle focus of the IMF bailout efforts during the Asian financial crisis was A) banking liquidity. B) shareholder's wealth. C) reestablishing fixed currency exchange rates in Asia. D) dollarization of Asian currencies.
Answer: A Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
19) The ________ is the Argentine currency unit. A) peso B) dollar C) real D) peseta
Answer: A Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
7) The authors compromise as to the key factors for exchange rate determination. They conclude that ________ are important in the short run, but that ________ determines long run exchange rates. A) Fisher effect; PPP B) asset markets, interest rates, and expectations; PPP C) PPP; Fisher effect D) Fisher effect; asset prices, interest rates, and expectations
Answer: B Diff: 1 Topic: 8.1 Exchange Rate Determination: The Theoretical Thread Skill: Conceptual
3) The ________ approach states that the exchange rate is determined by the supply and demand for national currency stocks, as well as the expected future levels and rates of growth of monetary stock A) balance of payments B) monetary C) asset market D) law of one price
Answer: B Diff: 1 Topic: 8.1 Exchange Rate Determination: The Theoretical Thread Skill: Recognition
21) The Russian Ruble crisis of 1998 was a complex combination of speculative pressures best explained by ________ to exchange rate determination. A) parity conditions approach B) asset approach C) balance of payments approach D) PPP approach
Answer: B Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
3) The Asian economic Crisis was A) direct result of hedge fund speculators. B) routed in structural deficiencies of the fast growing Asian economies. C) began when Thai government imposed capital controls. D) typical for transitions of net importer to net exporter countries.
Answer: B Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
1) Which of the following is a driver in the determination of foreign exchange rates under the Asset Market Approach to forecasting? A) relative inflation rates B) relative real interest rates C) forward exchange rates D) the current account balance
Answer: B Diff: 1 Topic: 8.4 Forecasting in Practice Skill: Recognition
3) The asset market approach to exchange rate determination A) suggests that investors will hold monetary claims if the rates are low. B) suggests that investors will hold monetary claims if they feel optimistic about country's outlook for growth and profitability. C) states that equilibrium exchange rate is found when the net inflow (outflow) from current account matches the net outflow (inflow) from financial account. D) discards the importance of corporate governance to cross-border portfolio investors.
Answer: B Diff: 2 Topic: 8.4 Forecasting in Practice Skill: Recognition
4) The ________ approach argues that exchange rates are determined by the supply and demand for a wide variety of financial assets A) balance of payments B) monetary C) asset market D) law of one price
Answer: C Diff: 1 Topic: 8.1 Exchange Rate Determination: The Theoretical Thread Skill: Recognition
10) Short-term foreign exchange forecasts are often motivated by such activities as ________ whereas long-term forecasts are more likely motivated by ________. A) long-term investment; long-term capital appreciation B) long-term capital appreciation; desire to hedge a receivable C) the desire to hedge a payable; the desire for long-term investment D) the desire for long-term investment; the desire to hedge a payable
Answer: C Diff: 1 Topic: 8.1 Exchange Rate Determination: The Theoretical Thread Skill: Recognition
10) ________ is the alteration of economic or financial fundamentals which are thought to be drivers of capital to flow in and out of specific currencies. A) Proportional intervention B) Direct intervention C) Indirect intervention D) Hopeless intervention
Answer: C Diff: 1 Topic: 8.2 Currency Market Intervention Skill: Recognition
23) Argentina's economic performance in the 1990s while their peso was pegged to the U.S. dollar can be characterized as ________ rates of inflation and ________ rates of unemployment. A) high; high B) low; low C) low; high D) high; low
Answer: C Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Conceptual
12) In the years immediately preceding 1998 the Russian Ruble operated under a ________ type of exchange rate regime. A) fixed B) free floating (market determined) C) managed floating D) pegged (to the U.S. dollar)
Answer: C Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
20) The Asian currency crisis was primarily a A) parity conditions problem. B) an asset markets problem. C) balance of payments problem. D) PPP problem.
Answer: C Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
10) The authors refer to the practice of many Asian firms being largely controlled by families of groups related to the governing body of the country as A) illegal. B) insider trading. C) cronyism. D) not in my backyard.
Answer: C Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
1) The Chinese government announces that on December 31, 2006 the value of the Yuan will officially change from 6.40 Yuan/$ to 6.00 Yuan/$. This would be an official ________ of the Chinese currency of ________. A) revaluation; 6.25% B) revaluation; 6.67% C) devaluation; 6.25% D) devaluation; 6.67%
Answer: B Diff: 1 Topic: 8.2 Currency Market Intervention Skill: Analytical
8) If the Central Bank's goal was to decrease the value of its currency, or to fight an appreciation of its currency's value on the foreign exchange market, the bank could A) buy its own currency with foreign currency. B) sell its own currency in exchange for foreign currency. C) sell foreign currency. D) do all of the above
Answer: B Diff: 1 Topic: 8.2 Currency Market Intervention Skill: Recognition
15) The Russian crisis of 1998 A) occurred because of the inability of the Russian Government to lower the taxes. B) ended when President Yeltsin announced there will be no devaluation. C) was a culmination of continuing deterioration of economic conditions. D) was a result of a sharp price increase of Russian export commodities.
Answer: C Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
5) The Asian Currency crisis appeared to begin in A) South Korea. B) Taiwan. C) Thailand. D) Japan.
Answer: C Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
6) Prior to July 2, 1997, the Thai government A) allowed the Thai Bhat to float against major currencies. B) fixed the Bhat's value against the Korean won only. C) fixed the Bhat's value against major currencies especially the U.S. dollar. D) None of the above.
Answer: C Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
12) A major U.S. multinational firm has forecast the euro/dollar rate to be euro1.10/$ one year hence, and an exchange rate of $1.40 for the British pound (£) in the same time period. What does this imply the company's expected rate for the euro per pound to be in one year? A) euro 1.40/£ B) £1.40/euro C) £1.54/euro D) euro 1.54/£
Answer: D Diff: 1 Topic: 8.1 Exchange Rate Determination: The Theoretical Thread Skill: Analytical
8) ________, traditionally referred to as chartists, focus on price and volume data to determine past trends that are expected to continue into the future. A) Mappists B) Trappist Monks C) Filibusters D) Technical analysts
Answer: D Diff: 1 Topic: 8.1 Exchange Rate Determination: The Theoretical Thread Skill: Recognition
1) The important thing to remember about foreign exchange rate determination is that parity conditions, asset approach, and balance of payments approaches are ________ theories rather than ________ theories. A) competing; complementary B) competing; contemporary C) complementary; contiguous D) complementary; competing
Answer: D Diff: 1 Topic: 8.1 Exchange Rate Determination: The Theoretical Thread Skill: Recognition
6) The ________ approach to the determination of spot exchange rates hypothesizes that the most important factors are the relative real interest rate and a country's outlook for economic growth and profitability. A) balance of payments B) parity conditions C) managed float D) asset market
Answer: D Diff: 1 Topic: 8.1 Exchange Rate Determination: The Theoretical Thread Skill: Recognition
2) Indirect intervention is A) the alteration of economic and financial fundamentals driving currency capital flows. B) Central Bank implementing restrictive monetary policy aiming to drive real rates up. C) the sharp increase in Turkish repo rates from 4.5% to 10% in 2014. D) All of the above
Answer: D Diff: 1 Topic: 8.2 Currency Market Intervention Skill: Recognition
1) Which of the following was NOT an international currency crisis in the 1990s and early 2000s? A) the Asian Crisis B) the Russian Crisis C) the Argentine Crisis D) All of the above were currency crises in the 1990s and 2000s.
Answer: D Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
13) ________ is the official Chinese currency. A) Baht B) Won C) Ringgit D) Renminbi
Answer: D Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
17) After the Russian government (in August 1998) allowed the Ruble to move outside its official trading range of between Ru5.70/$-Ru6.35/$, the value of the Ruble eventually ________ to around ________ by May 1999. A) increased; Ru13/$ B) increased; Ru4.50/$ C) decreased; Ru13/$ D) decreased; Ru25/$
Answer: D Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
2) A currency board is A) a structure, rather than a mere commitment, to limiting the growth of the money supply in the economy. B) a recipe for conservative and prudent financial management. C) designed to eliminate the power of politicians to exercise judgment by relying on an automatic and unbendable rule. D) all of the above.
Answer: D Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
4) Which of the following did NOT contribute to the exchange rate collapse in emerging markets in the 1990s? A) infrastructure weaknesses B) speculation on the part of market participants C) the sharp reduction of cross-border foreign direct investment D) All of the above contributed to the emerging markets exchange rate collapse of the 1990s.
Answer: D Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
7) The "tequila effect" is a slang term used to describe a form of financial panic called A) run on the market. B) speculation. C) contrary investing. D) contagion.
Answer: D Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
4) The fall in the value of the domestic currency will sharply reduce the purchasing power of its people.
Answer: TRUE Diff: 1 Topic: 8.2 Currency Market Intervention Skill: Conceptual
9) When country Central banks work together to intervene and push a particular currency's value in a desired direction, this is known as coordinated intervention.
Answer: TRUE Diff: 1 Topic: 8.2 Currency Market Intervention Skill: Recognition
14) The stability of the Russian Ruble in the 1990s (until the Russian debt crisis) was considered an observable success of the Yeltsin administration.
Answer: TRUE Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
22) In 1991 the Argentine peso was fixed to the value of the U.S. dollar on a one-to-one basis.
Answer: TRUE Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
6) The authors claim that random events, institutional frictions, and technical factors may cause currency values to deviate significantly from their long-term fundamental path.
Answer: TRUE Diff: 1 Topic: 8.4 Forecasting in Practice Skill: Conceptual
2) Short-term forecasts are typically motivated by a desire to hedge a receivable, payable, or dividend for perhaps a period of three months.
Answer: TRUE Diff: 1 Topic: 8.4 Forecasting in Practice Skill: Conceptual
7) The authors claim that theoretical and empirical studies appear to show that fundamentals do apply to the long-term for foreign exchange.
Answer: TRUE Diff: 1 Topic: 8.4 Forecasting in Practice Skill: Conceptual
Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should ________. A) increase; not change B) decrease; not change C) not change; increase D) not change; not change
B) decrease; not change
34) A ________ is an exchange rate quoted today for settlement at some time in the future.
B) forward rate
9) Corporate socialism in the Asian markets could be contributed in part A) to the relatively short and stable post-WWII history of capitalism in their markets. B) a belief by the owners of Asian companies that their governments would not allow them to fail. C) the practice of lifetime employment at many corporations. D) all of the above.
Answer: D Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
9) The longer the time horizon of the technical analyst the more accurate the prediction of foreign exchange rates is likely to be.
Answer: FALSE Diff: 1 Topic: 8.1 Exchange Rate Determination: The Theoretical Thread Skill: Conceptual
5) There is a long-standing saying that "what worries bankers is unemployment, but what worries elected officials is inflation."
Answer: FALSE Diff: 1 Topic: 8.2 Currency Market Intervention Skill: Recognition
18) It is safe to say that the Russian transition from a communist economy to a capitalist economy has been smooth for the Russian people.
Answer: FALSE Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
24) During the 1990s Argentina's exports became some of the least expensive in all of South America thanks in part to the pegging of the Argentine peso to the U.S. dollar.
Answer: FALSE Diff: 1 Topic: 8.3 Disequilibrium: Exchange Rates in Emerging Markets Skill: Recognition
4) The more INEFFICIENT the market is, the more likely it is that exchange rates are "random walks," with past price behavior providing no clues to the future.
Answer: FALSE Diff: 1 Topic: 8.4 Forecasting in Practice Skill: Conceptual
5) The authors claim that the theories of international currency values hold better for less liquid and poorly capitalized markets.
Answer: FALSE Diff: 1 Topic: 8.4 Forecasting in Practice Skill: Conceptual
8) In the long run, exchange rates will never follow a fundamental equilibrium path as suggested by the fundamental theories of exchange rate determination.
Answer: FALSE Diff: 1 Topic: 8.4 Forecasting in Practice Skill: Conceptual
11) The more efficient the foreign exchange market is, the more likely it is that exchange rate movements are random walks.
Answer: TRUE Diff: 1 Topic: 8.1 Exchange Rate Determination: The Theoretical Thread Skill: Conceptual
2) It is safe to say that most determinants of the spot exchange rate are also affected by changes in the spot rate. i.e., they are linked AND mutually determined.
Answer: TRUE Diff: 1 Topic: 8.1 Exchange Rate Determination: The Theoretical Thread Skill: Conceptual
5) Technical analysis of exchange rates was developed in part due to the forecasting inadequacies of fundamental exchange rate theories.
Answer: TRUE Diff: 1 Topic: 8.1 Exchange Rate Determination: The Theoretical Thread Skill: Conceptual
A U.S. firm sells merchandise today to a British company for £100,000. The current exchange rate is $2.03/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to $2.05/£ the U.S. firm will realize a ________ of ________.
gain; $2000
Roche, the leading pharmaceutical company, has taken more than a thousand drugs through the federal approval process and so can do it more cost efficiently than many of its competitors who are relatively new to the industry. Which of the following refers to cost savings that come to Roche in the drug approval process?
learning effects - refer to the cost savings that come from learning by doing, labor, for example, learns by repetition how to carry out a task, such as assembling airframes, most efficiently.
Imagine a multinational professional service firm that offers high-end legal and tax advise to millionaires in 70 countries around the world. Most likely this company follows a(n) ___ strategy:
localization
A U.S. firm sells merchandise today to a British company for £100,000. The current exchange rate is $2.03/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to $2.01/£ the U.S. firm will realize a ________ of ________.
loss; $2,000
A U.S. firm sells merchandise today to a British company for £150,000. The current exchange rate is $1.55/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to $1.58/£ the U.S. firm will realize a ________ of ________. A) loss; $4,500 B) gain; $4,500 C) loss; £4,500 D) gain; £4,500
B) gain; $4,500
A ________ hedge refers to an offsetting operating cash flow such as a payable arising from the conduct of business. A) financial B) natural C) contractual D) futures
B) natural
10) As a general statement, it is safe to say that businesses generally use the ________ for foreign currency option contracts, and individuals and financial institutions typically use the ________. A) exchange markets; over-the-counter B) over-the-counter; exchange markets C) private; government sponsored D) government sponsored; private
B) over-the-counter; exchange markets
15) Exchange rate pass-through may be defined as:
B) the degree to which the prices of imported and exported goods change as a result of exchange rate changes.
21) Which of the following is NOT true for the writer of a call option? A) The maximum loss is unlimited. B) The maximum gain is unlimited. C) The gain or loss is equal to but of the opposite sign of the buyer of a call option. D) All of the above are true.
B) the maximum gain is unlimited
According to a survey by Bank of America, the type of foreign exchange risk most often hedged by firms is: A) translation exposure. B) transaction exposure. C) contingent exposure. D) economic exposure.
B) transaction exposure.
3) If the current exchange rate is 113 Japanese yen per U.S. dollar, the price of a Big Mac hamburger in the United States is $3.41, and the price of a Big Mac hamburger in Japan is 280 yen, then other things equal, the Big Mac hamburger in Japan is:
B) under priced.
13) If we set the real effective exchange rate index between the United Kingdom and the United States equal to 100 in 2005, and find that the U.S. dollar has changed to a value of 91.4, then from a competitive perspective the U.S. dollar is:
B) undervalued.
5) Assume the implied PPP rate of exchange of Mexican Pesos per U.S. dollar is 8.50 according to the Big Mac Index. Further, assume the current exchange rate is Peso 10.80/$1. Thus, according to PPP and the Law of One Price, at the current exchange rate the peso is:
B) undervalued.
14) Dash Brevenshure works for the currency trading unit of ING Bank in London. He speculates that in the coming months the dollar will rise sharply vs. the pound. What should Dash do to act on his speculation? A) Buy a call on the pound. B) Sell a call on the pound. C) Buy a put on the pound. D) Sell a put on the pound.
C
18) Your U.S firm has an accounts payable denominated in UK pounds due in 6 months. To protect yourself against unexpected changes in the dollar/pound exchange rate you should: A) buy a pound put option. B) sell a pound put option. C) buy a pound call option. D) sell a pound call option.
C
24) The value of a European style call option is the sum of two components: A) the present value plus the intrinsic value. B) the time value plus the present value. C) the intrinsic value plus the time value. D) the intrinsic value plus the standard deviation.
C
3) Assume that a call option has an exercise price of $1.50/£. At a spot price of $1.45/£, the call option has: A) a time value of $0.04. B) a time value of $0.00. C) an intrinsic value of $0.00. D) an intrinsic value of -$0.04.
C
3) The price at which an option can be exercised is called the: A) premium. B) spot rate. C) strike price. D) commission.
C
5) As an option moves further in-the-money delta moves toward: A) 0. B) -1. C) 1. D) large numbers.
C
5) Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit is called a: A) collateralized deposit. B) marked market sum. C) margin. D) settlement.
C
6) A call option whose exercise price exceeds the spot price is said to be: A) in-the-money. B) at-the-money. C) out-of-the-money. D) over-the-spot.
C
6) A speculator in the futures market wishing to lock in a price at which they could ________ a foreign currency will ________ a futures contract. A) buy; sell B) sell; buy C) buy; buy D) none of the above
C
7) A speculator that has ________ a futures contract has taken a ________ position. A) sold; long B) purchased; short C) sold; short D) purchased; sold
C
8) One year ago the spot rate of U.S. dollars for Canadian dollars was $1/C$1. Since that time the rate of inflation in the U.S. has been 4% greater than that in Canada. Based on the theory of Relative PPP, the current spot exchange rate of U.S. dollars for Canadian dollars should be approximately:
C) $1.04/C$.
18) Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper would earn a higher rate of return by buying yen and selling a forward contract than if he had invested her money in 6-month US Treasury securities at an annual rate of 2.50%.
False
19) The time value is asymmetric in value as you move away from the strike price (i.e., the time value at two cents above the strike price is not necessarily the same as the time value two cents below the strike price).
False
20) If a market basket of goods cost $100 is the US and €70 in France, then the PPP exchange rate would be $.70/€.
False
21) The assumptions for relative PPP are more rigid than the assumptions for absolute PPP.
False
21) The time value is asymmetric in value as you move away from the strike price (i.e., the time value at two cents above the strike price is not necessarily the same as the time value two cents below the strike price).
False
22) Empirical tests prove that PPP is an accurate predictor of future exchange rates.
False
25) The value of any option that is currently in-the-money (ITM) is made up entirely of time value.
False
27) If the rho of the specific option is known, it is easy to determine how the option's value will change as the spot rate changes.
False
27) Most option profits and losses are realized through taking actual delivery of the currency rather than offsetting contracts.
False
29) Option values increase with the length of time to maturity. The expected change in the option premium from a small change in the time to expiration is termed delta.
False
31) A trader who is buying options of longer maturities will pay more, and proportionately more, for the longer maturity options.
False
39) The expected change in the option premium from a small change in the foreign interest rate (foreign currency) is term vega.
False
43) The final component of the equation for the Fisher Effect, (r)(π), where r = the real rate of return and π = the expected rate of inflation, is often dropped from the equation because the number is simply too large for most Western economies.
False
44) Empirical studies show that the Fisher Effect works best for short-term securities
False
45) The current U.S. dollar-yen spot rate is ¥125/$. If the 90-day forward exchange rate is ¥127/$ then the yen is at a forward premium.
False
47) Use interest rate parity to answer this question. A U.S. investor has a choice between a risk-free one-year U.S. security with an annual return of 4%, and a comparable British security with a return of 5%. If the spot rate is $1.43/£, the forward rate is $1.44/£, and there are no transaction costs, the investor should invest in the U.S. security.
False
48) Both covered and uncovered interest arbitrage are risky operations in the sense that even without default in the securities, the returns are unknown until all transactions are complete.
False
50) COVERED interest arbitrage (CIA), is where investors borrow in countries and currencies exhibiting relatively low interest rates and convert the proceeds into currencies that offer much higher interest rates. The transaction is "covered," because the investor does not sell the higher yielding currency proceeds forward.
False
57) If the forward exchange rate is an unbiased predictor of future spot rates, then future spot rates will always be equal to current forward rates.
False
58) If exchange markets were efficient, the deviation of the actual future quote and today's forward rate will be zero.
False
Hedging, or reducing risk, is the same as adding value or return to the firm.
False
Companies following a(n) ___ tend to face ___:
International strategy; low pressures reduce the costs of value creation
Which of the following is a disadvantage of a strategic alliance?
Strategic alliance gives competitors a low-cost route to new technology and markets. - some scholars have criticized strategic alliances on the grounds and that they give competitors a low-cost route to new technology and markets.
________ exposure is the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last transaction.
Translation
16) Currency futures contracts have become standard fare and trade readily in the world money centers.
True
17) The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients.
True
17) The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients. Answer: TRUE
True
2) In their approximate form, PPP, IRP, and forward rates as an unbiased predictor of the future spot rate lead to similar forecasts of the future spot rate.
True
20) The price of an option is always somewhat greater than its intrinsic value, since there is always some chance that the intrinsic value will rise between the present and the expiration date.
True
22) Standard foreign currency options are priced around the forward rate.
True
23) As long as the option has time remaining before expiration, the option will possess time the time value element.
True
24) If an American-style option possesses time value on any day up to expiration date, the option holder would get more by selling it than exercising it.
True
25) The writer of the option is referred to as the seller, and the buyer of the option is referred to as the holder.
True
26) Foreign currency options are available both over-the-counter and on organized exchanges.
True
28) The higher the delta the greater the probability of the option expiring in-the-money.
True
30) The majority of the option premium is lost in the final days prior to expiration.
True
37) A trader who is purchasing a call option on foreign currency should do so before the domestic interest rate rises.
True
38) The expected change in the option premium from a small change in the domestic interest rate (home currency) is term rho.
True
46) The premium or discount on forward currency exchange rates between any two countries is visually obvious when you plot the interest rates of each country on the same yield curve. The currency of the country with the higher yield curve should be selling at a forward discount.
True
49) All that is required for a covered interest arbitrage profit is for interest rate parity to not hold.
True
56) If exchange markets were not efficient, it would pay for a firm to spend resources on forecasting exchange rates.
True
In efficient markets, interest rate parity should assure that the costs of a forward hedge and money market hedge should be approximately the same.
True
7) Other things equal, and assuming efficient markets, if a Honda Accord costs $24,682 in the U.S., then at an exchange rate of $1.57/£, the Honda Accord should cost ________ in Great Britain.
]D) £15,721
The main technique to minimize translation exposure is called a/an ________ hedge.
balance sheet
Company A is a large computer manufacturer in the US, which faces aggressive competition from all major companies in the largest market in the world. Company A started a few years ago to venture into new markets. Currently, Company A has a NEW product, which is manufactured only in the plant you work for. Regarding how they want to position that product, you were told Company A wants to "fully realize experience curve effects". From what you have been told, regarding this new product, it is most likely that Company A will:
concentrate production, maximizing capacity in that single facility, or very few like it
Company A suffers high __ pressures, which drives it to ___. On the other hand, Company B suffers high ___ pressures, which drives it to
cost; standardize its products or services globally; local responsiveness; customize its products or services regionally
The basic advantage of the ________ method of foreign currency translation is that foreign nonmonetary assets are carried at their original cost in the parent's consolidated statement while the most important advantage of the ________ method is that the gain or loss from translation does not pass through the income statement.
current rate; temporal
Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should ________.
decrease; not change
By producing its products in larger volume than its competitors, company X is able to achieve substantial reductions in unit cost. Which of the following refers to company X's advantage?
economies of scale - refer to the reductions in unit cost achieved by producing a large volume of a product
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. ∙ The spot exchange rate is $1.40/euro ∙ The six month forward rate is $1.38/euro ∙ Plains States' cost of capital is 11% ∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) ∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) ∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) ∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months) ∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5% ∙ Plains States' forecast for 6-month spot rates is $1.43/euro ∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro Refer to Instruction 10.1. If Plains States chooses to hedge its transaction exposure in the forward market, it will ________ euro 1,250,000 forward at a rate of ________.
sell; $1.38/euro
Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses may reduce taxes over a series of years.
transaction; Operating
Transaction exposure and operating exposure exist because of unexpected changes in future cash flows. The difference between the two is that ________ exposure deals with cash flows already contracted for, while ________ exposure deals with future cash flows that might change because of changes in exchange rates.
transaction; operating
Imagine a multinational professional service firm that offers tax advise and support to low income professionals in 70 countries around the world. Mostly likely this company follows a(n) ___ strategy.
transnational
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. ∙ The spot exchange rate is $1.40/euro ∙ The six month forward rate is $1.38/euro ∙ Plains States' cost of capital is 11% ∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) ∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) ∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) ∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months) ∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5% ∙ Plains States' forecast for 6-month spot rates is $1.43/euro ∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro Refer to Instruction 10.1. Plains States could hedge the Euro receivables in the money market. Using the information provided, how much would the money market hedge return in six months assuming Plains States reinvests the proceeds at the U.S. investment rate?
$1,724,880
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. ∙ The spot exchange rate is $1.40/euro ∙ The six month forward rate is $1.38/euro ∙ Plains States' cost of capital is 11% ∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) ∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) ∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) ∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months) ∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5% ∙ Plains States' forecast for 6-month spot rates is $1.43/euro ∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro Refer to Instruction 10.1. Plains States chooses to hedge its transaction exposure in the forward market at the available forward rate. The payoff in 6 months will be ________.
$1,725,000
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. ∙ The spot exchange rate is $1.40/euro ∙ The six month forward rate is $1.38/euro ∙ Plains States' cost of capital is 11% ∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) ∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) ∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) ∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months) ∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5% ∙ Plains States' forecast for 6-month spot rates is $1.43/euro ∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro Refer to Instruction 10.1. If Plains States locks in the forward hedge at $1.38/euro, and the spot rate when the transaction was recorded on the books was $1.40/euro, this will result in a "foreign exchange loss" accounting transaction of ________.
$25,000
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. ∙ The spot exchange rate is $1.40/euro ∙ The six month forward rate is $1.38/euro ∙ Plains States' cost of capital is 11% ∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) ∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) ∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) ∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months) ∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5% ∙ Plains States' forecast for 6-month spot rates is $1.43/euro ∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro Refer to Instruction 10.1. What is the cost of a put option hedge for Plains States' euro receivable contract? (Note: Calculate the cost in future value dollars and assume the firm's cost of capital as the appropriate interest rate for calculating future values.)
$27,694
A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the parent in U.S. dollars. The Canadian subsidiary records the accounts receivable in Canadian dollars and notes a profit on the sale of goods. Later, when the U.S. parent pays the subsidiary the contracted U.S. dollar amount, the Canadian dollar has appreciated 10% against the U.S. dollar. In this example, the Canadian subsidiary will record a
10% foreign exchange loss on the U.S. dollar accounts receivable.
Fitbit, Inc. sells its fitness wrist band for $150. It cost the company $62 to make the product. Customers value the wrist band at $170. In this scenario, Fitbit's consumer surplus is
20 - consumer surplus = value of product to avg consumer - price per unit
9) Jack Hemmings bought a 3-month British pound futures contract for $1.4400/£ only to see the dollar appreciate to a value of $1.4250 at which time he sold the pound futures. If each pound futures contract is for an amount of £62,500, how much money did Jack gain or lose from his speculation with pound futures? A) $937.50 loss B) $937.50 gain C) £937.50 loss D) £937.50 gain
A) $937.50 loss
33) ________ states that the spot exchange rate should change in an equal amount but in the opposite direction to the difference in interest rates between two countries.
A) Fisher-open
________ exposure measures the change in the present value of the firm resulting from unexpected changes in exchange rates. A) Operating B) Transaction C) Translation D) Accounting
A) Operating
4) The price of a Big Mac in the U.S. is $3.41 and the price in Mexico is Peso 29.0. What is the implied PPP of the Peso per dollar?
A) Peso 8.50/$1
8) Peter Simpson thinks that the U.K. pound will cost $1.43/£ in six months. A 6-month currency futures contract is available today at a rate of $1.44/£. If Peter was to speculate in the currency futures market, and his expectations are correct, which of the following strategies would earn him a profit? A) Sell a pound currency futures contract. B) Buy a pound currency futures contract. C) Sell pounds today. D) Sell pounds in six months.
A) Sell a pound currency futures contract
When there is a full forward cover with the spot rate equal to the forward rate all of the following are true EXCEPT: A) The hedge is asymmetric. B) There is no uncovered exposure remaining. C) The total position is a perfect hedge. D) The currency hedge ratio is equal to 1.
A) The hedge is asymmetric.
Refer to Instruction 10.1. CVT would be ________ by an amount equal to ________ with a forward hedge than if they had NOT hedged and their predicted exchange rate for 6 months had been correct. A) better off; $150,000 B) better off; €150,000 C) worse off; $150,000 D) worse off; €150,000
A) better off; $150,000
________ is NOT a popular contractual hedge against foreign exchange transaction exposure.
All of the above are contractual hedges.
12) Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. Jasper should ________ at ________ to profit from changing currency values. A) buy yen; the forward rate B) buy dollars; the forward rate C) sell yen; the forward rate D) There is not enough information to answer this question.
A) buy yen; the forward rate
Refer to Instruction 10.1. If CVT chooses to hedge its transaction exposure in the forward market, it will ________ euro 3,000,000 forward at a rate of ________. A) buy; $1.22 B) buy; $1.25 C) sell; $1.22 D) sell; €1.25
A) buy; $1.22
2) A foreign currency ________ option gives the holder the right to ________ a foreign currency, whereas a foreign currency ________ option gives the holder the right to ________ an option. A) call, buy, put, sell B) call, sell, put, buy C) put, hold, call, release D) none of the above
A) call, buy, put, sell
55) Empirical tests have yielded ________ evidence about market efficiency with a general consensus that developing foreign markets are ________.
A) conflicting; not efficient
19) The price elasticity of demand for DVD players manufactured by Sony of Japan is greater than one. If the Japanese yen appreciates against the U.S. dollar by 10% and the price of the Sony DVD players in the U.S also rises by 10%, then other things equal, the total dollar sales revenues of Sony DVDs would:
A) decline.
2) A foreign currency ________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, place, and price. A) futures B) forward C) option D) swap
A) futures
7) A call option whose exercise price is less than the spot price is said to be: A) in-the-money. B) at-the-money. C) out-of-the-money. D) under-the-spot.
A) in-the-money
A U.S. firm sells merchandise today to a British company for £150,000. The current exchange rate is $1.55/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to $1.52/£ the U.S. firm will realize a ________ of ________. A) loss; $4,500 B) gain; $4,500 C) loss; £4,500 D) gain; £4,500
A) loss; $4,500
11) A country's currency that strengthened relative to another country's currency by more than that justified by the differential in inflation is said to be ________ in terms of PPP.
A) overvalued
12) If we set the real effective exchange rate index between Canada and the United States equal to 100 in 1998, and find that the U.S. dollar has risen to a value of 112.6, then from a competitive perspective the U.S. dollar is:
A) overvalued.
38) The forward rate is calculated from all the following observable data items EXCEPT:
A) the forecast of the future spot exchange rate
42) Covered interest arbitrage moves the market ________ equilibrium because ________.
A) toward; purchasing a currency on the spot market and selling in the forward market narrows the differential between the two
Transaction exposure and operating exposure exist because of unexpected changes in future cash flows. The difference between the two is that ________ exposure deals with cash flows already contracted for, while ________ exposure deals with future cash flows that might change because of changes in exchange rates. A) transaction; operating B) operating; transaction C) operating; accounting D) none of the above
A) transaction; operating
19) The maximum gain for the purchaser of a call option contract is ________ while the maximum loss is ________. A) unlimited; the premium paid. B) the premium paid; unlimited. C) unlimited; unlimited. D) unlimited; the value of the underlying asset.
A) unlimited; the premium paid
________ exposure is the potential for accounting-derived changes in owner's equity to occur because of the need to translate foreign currency financial statements into a single reporting currency.
Accounting
________ is a technique used by MNEs to deal with currency exposure.
All are techniques MNEs could use.
Which of the following is cited as a good reason for NOT hedging currency exposures?
All of the above are cited as reasons NOT to hedge.
12) Refer to Table 7.1. The exercise price of ________ giving the purchaser the right to sell pounds in June has a cost per pound of ________ for a total price of ________. A) 1460; 0.68 cents; $425.00 B) 1440; 1.06 cents; $662.50 C) 1450; 1.02 cents; $637.50 D) 1440; 1.42 cents; $887.50
B
15) Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. If Jasper's expectations are correct, then he could profit in the forward market by ________ and then ________. A) buying yen for ¥128.00/$; selling yen at ¥128.53/$ B) buying yen for ¥128.53/$; selling yen at ¥128.00/$ C) There is not enough information to answer this question. D) He could not profit in the forward market.
B
17) A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02. What is the break-even price for the option? A) $2.03/£ B) $2.07/£ C) $2.05/£ D) The answer depends upon if this is a long or a short call option.
B
2) The ________ of an option is the value if the option were to be exercised immediately. It is the option's ________ value. A) intrinsic value; maximum B) intrinsic value; minimum C) time value; maximum D) time value; minimum
B
21) Which of the following is NOT true for the writer of a call option? A) The maximum loss is unlimited. B) The maximum gain is unlimited. C) The gain or loss is equal to but of the opposite sign of the buyer of a call option. D) All of the above are true.
B
4) About ________ of all futures contracts are settled by physical delivery of foreign exchange between buyer and seller. A) 0% B) 5% C) 50% D) 95%
B
4) If the spot rate changes from $1.70/£ to $1.71/£ and there is an option with an initial premium of $0.033/£ and a delta of 0.5, then the new option premium would be: A) $0.043/£. B) $0.038/£. C) $0.005/£. D) $1.715/£.
B
6) As an option moves further out-of-the-money, delta moves toward: A) 1.. B) 0. C) -1. D) large negative numbers.
B
8) An option whose exercise price is equal to the spot rate is said to be: A) in-the-money. B) at-the-money. C) out-of-the-money. D) on-the-spot.
B
17) A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02. What is the break-even price for the option? A) $2.03/£ B) $2.07/£ C) $2.05/£ D) The answer depends upon if this is a long or a short call option.
B) $2.07/£
Refer to Instruction 10.1. CVT chooses to hedge its transaction exposure in the forward market at the available forward rate. The required amount in dollars to pay off the accounts payable in 6 months will be: A) $3,000,000. B) $3,660,000. C) $3,750,000. D) $3,810,000.
B) $3,660,000.
Refer to Instruction 10.1. What is the cost of a call option hedge for CVT's euro receivable contract? (Note: Calculate the cost in future value dollars and assume the firm's cost of capital as the appropriate interest rate for calculating future values.) A) $57,600 B) $59,904 C) $62,208 D) $63,936
B) $59,904
4) About ________ of all futures contracts are settled by physical delivery of foreign exchange between buyer and seller. A) 0% B) 5% C) 50% D) 95%
B) 5%
________ exposure deals with cash flows that result from existing contractual obligations. A) Operating B) Transaction C) Translation D) Economic
B) Transaction
8) An option whose exercise price is equal to the spot rate is said to be: A) in-the-money. B) at-the-money. C) out-of-the-money. D) on-the-spot.
B) at-the-money
60) According to the International Fisher Effect, the forecast change in the spot rate between two countries is equal to:
B) but the opposite sign to the difference between nominal interest rates.
15) Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. If Jasper's expectations are correct, then he could profit in the forward market by ________ and then ________. A) buying yen for ¥128.00/$; selling yen at ¥128.53/$ B) buying yen for ¥128.53/$; selling yen at ¥128.00/$ C) There is not enough information to answer this question. D) He could not profit in the forward market.
B) buying yen for ¥128.53/$; selling yen at ¥128.00/$
13) Refer to Table 7.1. The May call option on pounds with a strike price of 1440 mean: A) $88/£ per contract. B) $0.88/£. C) $0.0088/£. D) none of the above
C
17) Jaguar has full manufacturing costs of their S-type sedan of £22,803. They sell the S-type in the UK with a 20% margin for a price of £27,363. Today these cars are available in the US for $55,000 which is the UK price multiplied by the current exchange rate of $2.01/£. Jaguar has committed to keeping the US price at $55,000 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $2.15/£, and Jaguar has not d against currency changes, what is the amount the company will receive in pounds at the new exchange rate?
B) £25,581
36) Assume the current U.S. dollar-yen spot rate is 90 ¥/$. Further, the current nominal 180-day rate of return in Japan is 1% and 2% in the United States. What is the approximate forward exchange rate for 180 days?
B) ¥89.55/$
1) A foreign currency ________ gives the purchaser the right, not the obligation, to buy a given amount of foreign exchange at a fixed price per unit for a specified period. A) future B) forward C) option D) swap
C
12) For a $1.50/£ call option with an initial premium of $0.033/£ and a phi value of -0.2, after an increase in the foreign interest (the pound sterling rate) rate from 8% to 9% - the new option premium would be: A) $0.035/£. B) $1.48/£. C) $0.031/£. D) $0.032/£.
C
13) Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. If Jasper buys $100,000 worth of yen at today's spot price and sells within the next six months at ¥128/$, he will earn a profit of: A) $146.09. B) $101,460.94. C) $1460.94. D) nothing; he will lose money
C
13) Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. If Jasper buys $100,000 worth of yen at today's spot price and sells within the next six months at ¥128/$, he will earn a profit of: A) $146.09. B) $101,460.94. C) $1460.94. D) nothing; he will lose money
C) $1460.94
29) Assume a nominal interest rate on one-year U.S. Treasury Bills of 2.60% and a real rate of interest of 1.00%. Using the Fisher Effect Equation, what is the approximate expected rate of inflation in the U.S. over the next year?
C) 1.60%
30) Assume a nominal interest rate on one-year U.S. Treasury Bills of 3.80% and a real rate of interest of 2.00%. Using the Fisher Effect Equation, what is the exact expected rate of inflation in the U.S. over the next year?
C) 1.76%
18) Jaguar has full manufacturing costs of their S-type sedan of £22,803. They sell the S-type in the UK with a 20% margin for a price of £27,363. Today these cars are available in the US for $55,000 which is the UK price multiplied by the current exchange rate of $2.01/£. Jaguar has committed to keeping the US price at $55,000 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $2.15/£, and Jaguar has not hedged against currency changes, what is the percentage margin the company will realize given the new exchange rate?
C) 12.2%
16) Phillips NV produces DVD players and exports them to the United States. Last year the exchange rate was $1.25/euro and Plillips charged 120 euro per player in Euroland and $150 per DVD player in the United States. Currently the spot exchange rate is $1.45/euro and Phillips is charging $160 per DVD player. What is the degree of pass through by Phillips NV on their DVD players?
C) 41.7%
________ are transactions for which there are, at present, no contracts or agreements between parties. A) Backlog exposure B) Quotation exposure C) Anticipated exposure D) none of the above
C) Anticipated exposure
14) Dash Brevenshure works for the currency trading unit of ING Bank in London. He speculates that in the coming months the dollar will rise sharply vs. the pound. What should Dash do to act on his speculation? A) Buy a call on the pound. B) Sell a call on the pound. C) Buy a put on the pound. D) Sell a put on the pound.
C) Buy a put on the pound
Which of the following is NOT cited as a good reason for hedging currency exposures? A) Reduced risk of future cash flows is a good planning tool. B) Reduced risk of future cash flows reduces the probability that the firm may not meet required cash flows. C) Currency risk management increases the expected cash flows to the firm. D) Management is in a better position to assess firm currency risk than individual investors.
C) Currency risk management increases the expected cash flows to the firm.
3) The price at which an option can be exercised is called the: A) premium. B) spot rate. C) strike price. D) commission.
C) Strike price
53) If the forward rate is an unbiased predictor of the expected spot rate, which of the following is NOT true?
C) The future spot rate will actually be equal to what the forward rate predicts.
32) According to the international Fisher Effect, if an investor purchases a five-year U.S. bond that has an annual interest rate of 5% rather than a comparable British bond that has an annual interest rate of 6%, then the investor must be expecting the ________ to ________ at a rate of at least 1% per year over the next 5 years.
C) U.S. dollar; appreciate
Each of the following is another name for operating exposure EXCEPT: A) economic exposure. B) strategic exposure. C) accounting exposure. D) competitive exposure.
C) accounting exposure.
18) Your U.S firm has an accounts payable denominated in UK pounds due in 6 months. To protect yourself against unexpected changes in the dollar/pound exchange rate you should: A) buy a pound put option. B) sell a pound put option. C) buy a pound call option. D) sell a pound call option.
C) buy a pound call option
6) A speculator in the futures market wishing to lock in a price at which they could ________ a foreign currency will ________ a futures contract. A) buy; sell B) sell; buy C) buy; buy D) none of the above
C) buy; buy
Refer to Instruction 10.1. If CVT locks in the forward hedge at $1.22/euro, and the spot rate when the transaction was recorded on the books was $1.25/euro, this will result in a "foreign exchange accounting transaction ________ of ________. A) loss; $90,000. B) loss; €90,000. C) gain; $90,000. D) gain; €90,000.
C) gain; $90,000.
28) In its approximate form the Fisher effect may be written as ________. Where: i = the nominal rate of interest, r = the real rate of return and π = the expected rate of inflation.
C) i = r + π
39) The theory of ________ states that the difference in the national interest rates for securities of similar risk and maturity should be equal to but opposite in sign to the forward rate discount or premium for the foreign currency, except for transaction costs.
C) interest rate parity
5) Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit is called a: A) collateralized deposit. B) marked market sum. C) margin. D) settlement.
C) margin
1) A foreign currency ________ gives the purchaser the right, not the obligation, to buy a given amount of foreign exchange at a fixed price per unit for a specified period. A) future B) forward C) option D) swap
C) option
6) A call option whose exercise price exceeds the spot price is said to be: A) in-the-money. B) at-the-money. C) out-of-the-money. D) over-the-spot.
C) out-of-the-money
1) Financial derivatives are powerful tools that can be used by management for purposes of: A) speculation. B) hedging. C) human resource management. D) A and B above
D
1) Which of the following is NOT a factor in determining the premium price of a currency option? A) the present spot rate B) the time to maturity C) the standard deviation of the daily spot price movement D) All of the above are factors in determining the premium price.
D
The stages in the life of a transaction exposure can be broken into three distinct time periods. The first time period is the time between quoting a price and reaching an actual sale agreement or contract. The next time period is the time lag between taking an order and actually filling or delivering it. Finally, the time it takes to get paid after delivering the product. In order, these stages of transaction exposure may be identified as: A) backlog, quotation, and billing exposure. B) billing, backlog, and quotation exposure. C) quotation, backlog, and billing exposure. D) quotation, billing, and backlog exposure.
C) quotation, backlog, and billing exposure.
7) A speculator that has ________ a futures contract has taken a ________ position. A) sold; long B) purchased; short C) sold; short D) purchased; sold
C) sold; short
24) The value of a European style call option is the sum of two components: A) the present value plus the intrinsic value. B) the time value plus the present value. C) the intrinsic value plus the time value. D) the intrinsic value plus the standard deviation.
C) the intrinsic value plus the time value
If an identical product can be sold in two different markets, and no restrictions exist on the sale or transportation of product between markets, the product's price should be the same in both markets. This is known as:
C) the law of one price.
Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses may reduce taxes over a series of years. A) accounting; Operating B) operating; Transaction C) transaction; Operating D) transaction; Accounting
C) transaction; Operating
6) According to the Big Mac Index, the implied PPP exchange rate is Mexican peso 8.50/$1 but the actual exchange rate is peso 10.80/$1. Thus, at current exchange rates the peso appears to be
C) undervalued; approximately 21%
Which of the following is NOT cited as a good reason for hedging currency exposures?
Currency risk management increases the expected cash flows to the firm.
10) Which of the following statements regarding currency futures contracts and forward contracts is NOT true? A) A futures contract is a standardized amount per currency whereas the forward contact is for any size desired. B) A futures contract is for a fixed maturity whereas the forward contract is for any maturity you like up to one year. C) Futures contracts trade on organized exchanges whereas forwards take place between individuals and banks with other banks via telecom linkages. D) All of the above are true.
D
11) For a $1.50/£ call option with an initial premium of $0.033/£ and a rho value of 0.2, after an increase in the U.S. dollar rate from 8% to 9% - the new ATM option premium would be: A) $0.037/£. B) $1.55/£. C) $0.036/£. D) $0.035/£.
D
11) Which of the following is NOT a difference between a currency futures contract and a forward contract? A) The futures contract is marked to market daily, whereas the forward contract is only due to be settled at maturity. B) The counterparty to the futures participant is unknown with the clearinghouse stepping into each transaction, whereas the forward contract participants are in direct contact setting the forward specifications. C) A single sales commission covers both the purchase and sale of a futures contract, whereas there is no specific sales commission with a forward contract because banks earn a profit through the bid-ask spread. D) All of the above are true.
D
14) Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. If Jasper buys $100,000 worth of yen at today's spot price her potential gain is ________ and her potential loss is ________. A) $100,000; unlimited B) unlimited; unlimited C) $100,000; $100,000 D) unlimited; $100,000
D
15) A put option on yen is written with a strike price of ¥105.00/$. Which spot price maximizes your profit if you choose to exercise the option before maturity? A) ¥100/$ B) ¥105/$ C) ¥110/$ D) ¥115/$
D
16) A call option on euros is written with a strike price of $1.30/euro. Which spot price maximizes your profit if you choose to exercise the option before maturity? A) $1.20/euro B) $1.25/euro C) $1.30/euro D) $1.35/euro
D
20) The buyer of a long call option: A) has a maximum loss equal to the premium paid. B) has a gain equal to but opposite in sign to the writer of the option. C) has an unlimited maximum gain potential. D) all of the above
D
22) Which of the following is NOT true for the writer of a put option? A) The maximum loss is limited to the strike price of the underlying asset less the premium. B) The gain or loss is equal to but of the opposite sign of the buyer of a put option. C) The maximum gain is the amount of the premium. D) All of the above are true.
D
23) The buyer (long) of a put option: A) has a maximum loss equal to the premium paid. B) has a gain equal to but opposite in sign to the writer of the option. C) has maximum gain potential limited to the difference between the strike price and the premium paid. D) all of the above
D
3) Which of the following is NOT a contract specification for currency futures trading on an organized exchange? A) size of the contract B) maturity date C) last trading day D) All of the above are specified.
D
4) An ________ option can be exercised only on its expiration date, whereas a/an ________ option can be exercised anytime between the date of writing up to and including the exercise date. A) American; European B) American; British C) Asian; American D) European; American
D
5) A/An ________ option can be exercised only on its expiration date, whereas a/an ________ option can be exercised anytime between the date of writing up to and including the exercise date. A) American; European B) American; British C) Asian; American D) European; American
D
16) A call option on euros is written with a strike price of $1.30/euro. Which spot price maximizes your profit if you choose to exercise the option before maturity? A) $1.20/euro B) $1.25/euro C) $1.30/euro D) $1.35/euro
D) $1.35/euro
1) Financial derivatives are powerful tools that can be used by management for purposes of: A) speculation. B) hedging. C) human resource management. D) A and B above
D) A and B above
________ exposure is the potential for accounting-derived changes in owner's equity to occur because of the need to translate foreign currency financial statements into a single reporting currency. A) Transaction B) Operating C) Economic D) Accounting (aka translation)
D) Accounting (aka translation)
Which of the following is cited as a good reason for NOT hedging currency exposures? A) Shareholders are more capable of diversifying risk than management. B) Currency risk management through hedging does not increase expected cash flows. C) Hedging activities are often of greater benefit to management than to shareholders. D) All of the above are cited as reasons NOT to hedge.
D) All of the above are cited as reasons NOT to hedge.
________ is NOT a commonly used contractual hedge against foreign exchange transaction exposure. A) Forward market hedge B) Money market hedge C) Options market hedge D) All of the above are contractual hedges.
D) All of the above are contractual hedges.
3) Which of the following is NOT a contract specification for currency futures trading on an organized exchange? A) size of the contract B) maturity date C) last trading day D) All of the above are specified.
D) All of the above are specified
10) Which of the following statements regarding currency futures contracts and forward contracts is NOT true? A) A futures contract is a standardized amount per currency whereas the forward contact is for any size desired. B) A futures contract is for a fixed maturity whereas the forward contract is for any maturity you like up to one year. C) Futures contracts trade on organized exchanges whereas forwards take place between individuals and banks with other banks via telecom linkages. D) All of the above are true.
D) All of the above are true
11) Which of the following is NOT a difference between a currency futures contract and a forward contract? A) The futures contract is marked to market daily, whereas the forward contract is only due to be settled at maturity. B) The counterparty to the futures participant is unknown with the clearinghouse stepping into each transaction, whereas the forward contract participants are in direct contact setting the forward specifications. C) A single sales commission covers both the purchase and sale of a futures contract, whereas there is no specific sales commission with a forward contract because banks earn a profit through the bid-ask spread. D) All of the above are true.
D) All of the above are true
22) Which of the following is NOT true for the writer of a put option? A) The maximum loss is limited to the strike price of the underlying asset less the premium. B) The gain or loss is equal to but of the opposite sign of the buyer of a put option. C) The maximum gain is the amount of the premium. D) All of the above are true.
D) All of the above are true
54) Which of the following is NOT an assumption of market efficiency?
D) All of the above are true.
4) An ________ option can be exercised only on its expiration date, whereas a/an ________ option can be exercised anytime between the date of writing up to and including the exercise date. A) American; European B) American; British C) Asian; American D) European; American
D) European; American
10) Two general conclusions can be made from the empirical tests of purchasing power parity (PPP):
D) PPP holds up well over the long run but poorly for the short run, and the theory holds better for countries with relatively high rates of inflation.
9) ________ states that differential rates of inflation between two countries tend to be offset over time by an equal but opposite change in the spot exchange rate.
D) Relative Purchasing Power Parity
27) ________ states that nominal interest rates in each country are equal to the required real rate of return plus compensation for expected inflation.
D) The Fisher Effect
Refer to Instruction 10.1. The cost of a put option to CVT would be: A) $52,500. B) $55,388. C) $58,275. D) There is not enough information to answer this question.
D) There is not enough information to answer this question.
20) The buyer of a long call option: A) has a maximum loss equal to the premium paid. B) has a gain equal to but opposite in sign to the writer of the option. C) has an unlimited maximum gain potential. D) all of the above
D) all of the above
23) The buyer (long) of a put option: A) has a maximum loss equal to the premium paid. B) has a gain equal to but opposite in sign to the writer of the option. C) has maximum gain potential limited to the difference between the strike price and the premium paid. D) all of the above
D) all of the above
40) With covered interest arbitrage:
D) all of the above
9) The main advantage(s) of over-the-counter foreign currency options over exchange traded options is (are): A) expiration dates tailored to the needs of the client. B) amounts that are tailor made. C) client desired expiration dates. D) all of the above
D) all of the above
A U.S. firm sells merchandise today to a British company for £150,000. The current exchange rate is $1.55/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. The U.S. firm is at risk today of a loss if: A) the exchange rate changes to $1.52/£. B) the exchange rate changes to $1.58/£. C) the exchange rate doesn't change. D) all of the above
D) all of the above
MNE cash flows may be sensitive to changes in which of the following? A) exchange rates B) interest rates C) commodity prices D) all of the above
D) all of the above
37) The current U.S. dollar-yen spot rate is 125¥/$. If the 90-day forward exchange rate is 127 ¥/$ then the yen is selling at a per annum ________ of ________.
D) discount; 6.30%
14) The government just released international exchange rate statistics and reported that the real effective exchange rate index for the U.S. dollar vs the Japanese yen decreased from 105 last year to 95 currently and is expected to fall still further in the coming year. Other things equal U.S. ________ to/from Japan think this is good news and U.S. ________ to/from Japan think this is bad news.
D) exporters; importers
41) Arbitragers applying Covered Interest Arbitrage drive the international currency and money markets toward the equilibrium described by:
D) the interest rate parity.
31) The relationship between the percentage change in the spot exchange rate over time and the differential between comparable interest rates in different national capital markets is known as:
D) the international Fisher Effect.
Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses are not cash losses and therefore, are not tax deductible. A) transaction; Operating B) accounting; Operating C) accounting; Transaction D) transaction; Translation
D) transaction; Translation
Refer to Instruction 10.1. If CVT chooses NOT to hedge their euro payable, the amount they pay in six months will be: A) $3,500,000. B) $3,900,000. C) €3,000,000. D) unknown today
D) unknown today
14) Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. If Jasper buys $100,000 worth of yen at today's spot price her potential gain is ________ and her potential loss is ________. A) $100,000; unlimited B) unlimited; unlimited C) $100,000; $100,000 D) unlimited; $100,000
D) unlimited; $100,000
35) Assume the current U.S. dollar-British spot rate is 0.6993£/$. If the current nominal one-year interest rate in the U.S. is 5% and the comparable rate in Britain is 6%, what is the approximate forward exchange rate for 360 days?
D) £0.7060/$
2) The Economist publishes annually the "Big Mac Index" by which they compare the prices of the McDonald's Corporation's Big Mac hamburger around the world. The index estimates the exchange rates for currencies based on the assumption that the burgers in question are the same across the world and therefore, the price should be the same. If a Big Mac costs $2.54 in the United States and 294 yen in Japan, what is the estimated exchange rate of yen per dollar as hypothesized by the Hamburger index?
D) ¥115.75/$
15) A put option on yen is written with a strike price of ¥105.00/$. Which spot price maximizes your profit if you choose to exercise the option before maturity? A) ¥100/$ B) ¥105/$ C) ¥110/$ D) ¥115/$
D) ¥115/$
23) Consider the price elasticity of demand. If a product has price elasticity less than one it is considered to have relatively elastic demand.
Fallse
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. ∙ The spot exchange rate is $1.40/euro ∙ The six month forward rate is $1.38/euro ∙ Plains States' cost of capital is 11% ∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) ∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) ∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) ∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months) ∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5% ∙ Plains States' forecast for 6-month spot rates is $1.43/euro ∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro Refer to Instruction 10.1. If Plains States purchases the put option, and the option expires in six months on the same day that Plains States receives the euro 1,250,000, the firm will exercise the put at that time if the spot rate is $1.43/euro.
False
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. ∙ The spot exchange rate is $1.40/euro ∙ The six month forward rate is $1.38/euro ∙ Plains States' cost of capital is 11% ∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) ∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) ∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) ∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months) ∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5% ∙ Plains States' forecast for 6-month spot rates is $1.43/euro ∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro Refer to Instruction 10.1. Money market hedges almost always return more than forward hedges because of the greater risk involved
False
________ exposure measures the change in the present value of the firm resulting from unexpected changes in exchange rates.
Operating
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. ∙ The spot exchange rate is $1.40/euro ∙ The six month forward rate is $1.38/euro ∙ Plains States' cost of capital is 11% ∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) ∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) ∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) ∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months) ∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5% ∙ Plains States' forecast for 6-month spot rates is $1.43/euro ∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro Refer to Instruction 10.1. The cost of a call option to Plains States would be ________.
There is not enough information to answer this question.
________ exposure may result from a firm having a payable in a foreign currency.
Transaction
________ gains and losses are "realized" whereas ________ gains and losses are only "paper."
Transaction; translation
Translation exposure may also be called ________ exposure.
accounting
Each of the following is another name for operating exposure EXCEPT ________.
accounting exposure
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. ∙ The spot exchange rate is $1.40/euro ∙ The six month forward rate is $1.38/euro ∙ Plains States' cost of capital is 11% ∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) ∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) ∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) ∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months) ∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5% ∙ Plains States' forecast for 6-month spot rates is $1.43/euro ∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro Refer to Instruction 10.1. If Plains States chooses to implement a money market hedge for the Euro receivables, how much money will the firm borrow today?
euro 1,196,172
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. ∙ The spot exchange rate is $1.40/euro ∙ The six month forward rate is $1.38/euro ∙ Plains States' cost of capital is 11% ∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) ∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) ∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) ∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months) ∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5% ∙ Plains States' forecast for 6-month spot rates is $1.43/euro ∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro Refer to Instruction 10.1. A ________ hedge allows Plains States to enjoy the benefits of a favorable change in exchange rates for their euro receivables contract while protecting the firm from unfavorable exchange rate changes.
put option
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. ∙ The spot exchange rate is $1.40/euro ∙ The six month forward rate is $1.38/euro ∙ Plains States' cost of capital is 11% ∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) ∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) ∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) ∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months) ∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5% ∙ Plains States' forecast for 6-month spot rates is $1.43/euro ∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro Refer to Instruction 10.1. If Plains States chooses not to hedge their euro receivable, the amount they receive in six months will be ________.
undeterminable today
The higher the difference between the value of a product to an average consumer and the price the company can sell it for, the higher its ___.
value for the money for the consumer
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. ∙ The spot exchange rate is $1.40/euro ∙ The six month forward rate is $1.38/euro ∙ Plains States' cost of capital is 11% ∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) ∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) ∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) ∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months) ∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5% ∙ Plains States' forecast for 6-month spot rates is $1.43/euro ∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro Refer to Instruction 10.1. Plains States would be ________ by an amount equal to ________ with a forward hedge than if they had not hedged and their predicted exchange rate for 6 months had been correct.
worse off; $62,500
