International Finance Midterm

A forward contract to deliver British pounds for U.S. dollars could be described either as ________ or ________.

selling pounds forward; buying dollars forward

If the direct quote for a U.S. investor for British pounds is $1.43/£, then the indirect quote for the U.S. investor would be ________ and the direct quote for the British investor would be ________.

$0.699/£; £0.699/$ A direct quote for the U.S. investor = indirect quote for a British investor. The reciprocal of a direct quote for a U.S. investor = direct quote for the British investor 1/1.43 = 0.6993

In January 2002, the Argentine Peso changed in value from Peso 1.00/$ to Peso 1.40/$, what is the percentage change in USD against Argentine Peso?

1.40/ 1.00 − 1 = 0.40 = 40%

________ seek to profit from trading in the market itself rather than having the foreign exchange transaction being incidental to the execution of a commercial or investment transaction.

Speculators and arbitrageurs

Under the gold standard of currency exchange that existed from 1879 to 1914, an ounce of gold cost $20.67 in U.S. dollars and £4.2474 in British pounds. Therefore, the exchange rate of pounds per dollar under this fixed exchange regime was ____________

$20.67 = £4.2474 → $20.67 20.67 = £4.2474 20.67 → $1 = £0.2055

The U.S. dollar suddenly changes in value against the euro moving from an exchange rate of 0.8909/€ to $0.8709/€. Thus, the dollar has ________ by ________.

0.8909/ 0.8709 − 1 = 0.0230 = 2.30%

In January 2002, the Argentine Peso changed in value from Peso 1.00/$ to Peso 1.40/$, what is the percentage change in Argentine Peso against USD?

1.00/ 1.40 − 1 = 0.7143 − 1 = 0.2857 = 28.57%

Suppose that you imported goods valued at ¥2,500,000 when the spot rate of JPY against USD was 113.25 and today the rate is 111.50. How does this effect your payment? (i.e. what is the percentage change in your payment and how much is it in USD terms?

1.57% increase JPY has appreciated by: 113.25/ 111.50 − 1 = 1.57% Thus, your payment has also increased by 1.57%

Suppose that you have EUR3,000 and you want to travel to Thailand from Paris and you need to change your euros to Thai Baht. You obtain the following quotes: EUR/USD= 1.1225 USD/THB=31.8132 How much THB will you get for your euros?

107,130.95 EUR3,000 = EUR3000*EUR/USD1.1225 = USD3,367.5 USD3,367.5 = USD3,367.5*USD/THB31.8132 = THB107,130.95

Refer to Table 5.1. According to the information provided in the table, the 6- month yen is selling at a forward ________ of approximately ________ per annum. (Use the mid rates to make your calculations.)

129.87/ 128.53 − 1 = 0.0209 = 2.09%

The annual average rate for Vietnamese đồng in 2015 was VND18,000=USD1. In 2018, it increased to VND23575=USD1. VND is managed by a crawling peg regime. Explain what happened to VND between 2015-2018.

18000/ 23575 − 1 = −23.65% VND's value has decreased but the name of this decrease is important: Since the question says: VND is managed... It is a devaluation.

The annual average rate for Vietnamese đồng in 2015 was VND18,000=USD1. In 2018, it increased to VND23575=USD1. VND is managed by a crawling peg regime. Explain what happened to USD against VND between 2015-2018.

23575/ 18000 − 1 = 30.97% Since USD is a free floating currency, this increase in its value is appreciation.

A U.S. firm sells merchandise today to a British company for £200,000. The current exchange rate is $1.2559=£, the account is payable in three months. If the exchange rate changes to $1.2749=£ the U.S. firm will realize a (gain/loss) [A] of USD [b].

A) Gain B) 3800 1.2749-1.2559=USD0.019 gain per pound. 200,000x0.019=USD 3,800 gain You could also do: On the sales day, the sales amount is: £200,000 *$1.2559/£=$251,180 On the payment day: £200,000*$1.2749/£ = 254,980 Difference= 254,980 - 251,180 = $3,800

Which of the following may be participants in the foreign exchange markets? bank and nonbank foreign exchange dealers central banks and treasuries speculators and arbitrageurs All of these

All of these

Foreign exchange ________ earn a profit by a bid-ask spread on currencies they purchase and sell. Foreign exchange ________, on the other hand, earn a profit by bringing together buyers and sellers of foreign currencies and earning a commission on each sale and purchase.

Dealers; brokers

A confusing "quirk" of international exchange rates occurs when calculating the percentage change in spot rates from one period to another. The percent change in the spot rate from one period to another when quoted using foreign currency terms is always greater than the percent changes quoted when using home currency terms.

False

As you might expect, the foreign exchange daily trading volume in in New York City is roughly twice as large as the daily trading volume in London.

False

Since the global financial crisis of 2008-2009, the Chinese renminbi (yuan) has become the most widely traded currency with the U.S. dollar surpassing the euro, yen, and pound as dollar trading pairs.

False

Currency trading lacks profitability for large commercial and investment banks but is maintained as a service for corporate and institutional customers.

False, Currency trading is often profitable for large commercial and investment banks.

The European and American terms for foreign currency exchange are square roots of one another.

False, The European and American terms for foreign currency exchange are the reciprocal of one another.

The primary motive of foreign exchange activities by most central banks is profit.

False, The primary motive of foreign exchange activities by most central banks is to influence the foreign exchange value of their currency in a manner that will benefit the interests of their citizens.

The reference rate of interest in the eurocurrency market is the:

London Interbank Offered Rate

Dealers in foreign exchange departments at large international banks act as market makers and maintain inventories of the securities in which they specialize.

True

The most commonly quoted currency exchange is that between the U.S. dollar and the European euro. For example, a quotation of EUR/USD 1.2174. The euro is the base currency and the dollar the price currency.

True

When the cross rate for currencies offered by two banks differs from the exchange rate offered by a third bank, a triangular arbitrage opportunity exists.

True

A German firm is attempting to determine the euro/pound exchange rate and has the following exchange rate information: USD/pound = $1.5509/£ and the USD/euro rate = $1.2194/€. Therefore, the euro/pound rate must be:

USD/pound = $1.5509/£ USD/euro rate = $1.2194/€. $1.5509 = 𝐺𝐵𝑃1 → $1 = 𝐺𝐵𝑃0.6448 $1.2194 = 𝐸𝑈𝑅 → $1 = 𝐸𝑈𝑅0.8201 𝐺𝐵𝑃0.6448 = 𝐸𝑈𝑅0.8201−> 𝐺𝐵𝑃 = €1.2719

In 2010 the United States posted a current account deficit of -$471 billion. The bulk of the negative value came from:

a goods trade deficit.

The financial account consists COMPLETELY of which four components?

direct investment, portfolio investment, net financial derivatives, and other asset investment

A ________ transaction in the foreign exchange market requires delivery of foreign exchange at some future date.

forward

A ________ transaction in the foreign exchange market requires an almost immediate delivery (typically within two days) of foreign exchange.

spot

Under an international regime of fixed exchange rates, countries with a BOP ________ should consider ________ their currency while countries with a BOP ________ should consider ________ their currency.

surplus, revaluing; deficit, devaluing

Financial globalization has not resulted in: continuing imbalances of balance of payments. an increase in quantity and speed in the flow of capital across the world. capital markets less open and a decrease in the availability of capital for many organizations. uniform ways of ownership, control, and governance across the world.

uniform ways of ownership, control, and governance across the world.

Under the gold standard of currency exchange that existed from 1879 to 1914, an ounce of gold cost $20.67 in U.S. dollars and £4.2474 in British pounds. Therefore, the exchange rate of dollars per pound under this fixed exchange regime was ____________ (GBP1=USD _____)

£4.2474 = $20.67 → £4.2474 4.2474 = $20.67 4.2474 → £1 = £1 = $4.8665

If EUR/USD=1.1405, you need EUR_______ to buy 1 USD

𝐸𝑈𝑅/ 𝑈𝑆𝐷 = 0.8768 → 𝑈𝑆𝐷/ 𝐸𝑈𝑅 = 1 /0.8768 = 0.8768

If Chinese renminbi (CNY) is revalued by 75% against the USD, what is the percentage change in USD a

𝑆0/ 𝑆1 − 1 = 0.75 → 𝑆1/ 𝑆0 − 1 =? 𝑆0/ 𝑆1 − 1 = 0.75 → 𝑆0/ 𝑆1 = 1.75 → 1.75𝑆1 = 𝑆0 → 𝑆1/ 1.75𝑆1 − 1 = −0.4286 = −42.86%

Refer to Table 5.1. The ask price for the two-year swap for a British pound is:

𝑆𝑜𝑙𝑢𝑡𝑖𝑜𝑛: 1.4487 + (−230/10,000) = 1.4257

Refer to Table 5.1. The one-month forward bid price for dollars as denominated in Japanese yen is:

𝑆𝑜𝑙𝑢𝑡𝑖𝑜𝑛: 129.82 + (−20/100) = 129.62