International Financial Management Exam 2
A common type of swap transaction in the foreign exchange market is the ________ where the dealer buys the currency in the spot market and sells the same amount back to the same bank in the forward market.
"spot against forward"
April 19, 2009, British Pound Option Prices (cents per pound, 62,500 pound contracts).Refer to Table 7.1. The May call option on pounds with a strike price of 1440 means:
$0.0088/£.
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:
$0.031/£.
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:
$0.035/£.
For a $1.50/£ call option with an initial premium of $0.033/£ and a lambda of 0.4, after an increase in annual volatility of 1 percent point — for example from 10% to 11% — the new option premium would be:
$0.037/£.
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:
$0.038/£.
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:
$1.04/C$.
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?
$1.35/euro
Refer to Table 5.1. The ask price for the two-year swap for a British pound is:
$1.4257/£.
April 19, 2009, British Pound Option Prices (cents per pound, 62,500 pound contracts). Refer to Table 7.1. What was the closing price of the British pound on April 18, 2009?
$1.448/£
Refer to Table 5.1. The current spot rate of dollars per pound as quoted in a newspaper is ________ or ________.
$1.4484/£; £0.6904/$
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:
$1460.94.
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?
$2.07/£
The following is an example of an American term foreign exchange quote:
$20/£
Daily trading volume in the foreign exchange market was about ________ per ________ in 2015.
$5,100 billion; day
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?
$937.50 loss
As an option moves further out-of-the-money, delta moves toward ________.
0
As an option moves further in-the-money, delta moves toward ________.
1
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 ________.
1440; 1.06 cents; $662.50
Phillips NV produces DVD players and exports them to the United States. Last year the exchange rate was $1.25/euro and Phillips charged 120 euro per player in Euroland and $150 per DVD player in the United States. Currently the spot exchange rate is $1.45/euro and Phillips is charging $160 per DVD player. What is the degree of pass through by Phillips NV on their DVD players?
41.7%
About ________ of all futures contracts are settled by physical delivery of foreign exchange between buyer and seller.
5%
The United Kingdom and United States together make up nearly ________ of daily currency trading.
60%
The asset market approach to forecasting assumes that whether foreigners are willing to hold claims in monetary form depends on an extensive set of investment considerations. These include all but which of the following choices?
All of these are considered by investors in their decision process.
Which of the following would be considered an example of a currency swap?
All of these are examples of a currency swap.
Which of the following is NOT a factor in determining the premium price of a currency option?
All of these are factors in determining the premium price
Which of the following is an unlikely reason for firms to participate in the swap market?
All of these are likely reasons for a firm to enter the swap market.
Which of the following is NOT a motivation for a government or central bank to manipulate domestic currency valuation?
All of these are motivations for the government or central bank to manipulate currency values.
Which of the following is NOT a technique used by governments or central banks to impact domestic currency valuation?
All of these are techniques used to control currency valuation.
Which of the following is NOT true regarding the market for foreign exchange?
All of these are true
Which of the following did NOT contribute to the exchange rate collapse in emerging markets in the 1990s?
All of these contributed to the emerging markets exchange rate collapse of the 1990s.
Which of the following is NOT a motivation identified by the authors as a function of the foreign exchange market?
All of these were identified as functions of the foreign exchange market.
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?
Buy a put on the pound
________ make money on currency exchanges by the difference between the ________ price, or the price they offer to pay, and the ________ price, or the price at which they offer to sell the currency.
Dealers; bid; ask
________ is the active buying and selling of the domestic currency against foreign currencies.
Direct Intervention
Most foreign exchange transactions are through the U.S. dollar. If the transaction is expressed as the foreign currency per dollar this known as ________ whereas ________ are expressed as dollars per foreign unit.
European terms; American terms
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.
European; American
If a financial manager earning interest on a future date were to buy Futures and interest rates end up going up, the position outcome would be:
Future price falls; long earns a loss.
If a financial manager with an interest liability on a future date were to sell Futures and interest rates end up going up, the position outcome would be:
Futures price falls; short earns a profit.
If a financial manager earning interest on a future date were to buy Futures and interest rates end up going down, the position outcome would be:
Futures price rises; long earns a profit.
If a financial manager with an interest liability on a future date were to sell Futures and interest rates end up going down, the position outcome would be:
Futures price rises; short earns a loss.
Which of the following statements is NOT true about currency option pricing sensitivities?
Increases in domestic interest rates cause decreasing call option premiums
While trading in foreign exchange takes place worldwide, the major currency trading centers are located in:
London, New York, and Tokyo.
Which of the following is NOT true regarding nondeliverable forward (NDF) contracts?
NDFs can only be traded by central banks.
The greatest amount of foreign exchange trading takes place in the following three cities:
New York, Singapore, and London.
Two general conclusions can be made from the empirical tests of purchasing power parity (PPP):
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.
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?
Peso 8.50/$1
Which of the following versions of PPP is thought to be the most relevant to possibly explaining what drives exchange rate values?
Relative Purchasing Power Parity
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?
Sell a pound currency futures contract.
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. •Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. •Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% •Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.
Strategies #1 and #2
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. •Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. •Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% •Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.Refer to Instruction 8.1. If your firm felt very confident that interest rates would fall or, at worst, remain at current levels, and were very confident about the firm's credit rating for the next 10 years, which strategy would you likely choose? (Assume your firm is borrowing money.)
Strategy #3
The Asian Currency crisis appeared to begin in:
Thailand
Which of the following is NOT true for the writer of a call option?
The maximum gain is unlimited
By 2001, crisis conditions had revealed three very important underlying problems Argentina's economy EXCEPT:
The printing of paper money without restrictions, resulting in hyperinflation.
The top three currency pairs traded with the U.S. dollar are:
U.K. pound, euro, Japanese yen
The four currencies that constitute about 80% of all foreign exchange trading are:
U.S. dollar, Japanese yen, euro, and U.K. pound.
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. •Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. •Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% •Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.Refer to Instruction 8.1. After the fact, under which set of circumstances would you prefer strategy #3? (Assume your firm is borrowing money.)
Your credit rating improved and interest rates went down.
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. •Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. •Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% •Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.Refer to Instruction 8.1. After the fact, under which set of circumstances would you prefer strategy #2? (Assume your firm is borrowing money.)
Your credit rating stayed the same and interest rates went down.
Each is intended to provide $1,000,000 in financing for a three-year period. •Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. •Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% •Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.Refer to Instruction 8.1. After the fact, under which set of circumstances would you prefer strategy #1? (Assume your firm is borrowing money.)
Your credit rating stayed the same and interest rates went up.
It is characteristic of foreign exchange dealers to:
act as market makers, willing to buy and sell the currencies in which they specialize
A currency board is:
all of these
The buyer (long) of a put option:
all of these
The buyer of a long call option:
all of these
The main advantage(s) of over-the-counter foreign currency options over exchange traded options is (are):
all of these
Which of the following did NOT contribute to the Russian currency crisis of 1998?
all of these
Which of the following may be participants in the foreign exchange markets?
all of these
Which of the following is NOT a contract specification for currency futures trading on an organized exchange?
all of these are specified
Which of the following is NOT a difference between a currency futures contract and a forward contract?
all of these are true
Which of the following is NOT true for the writer of a put option?
all of these are true
Which of the following statements regarding currency futures contracts and forward contracts is NOT true?
all of these are true
Assume that a call option has an exercise price of $1.50/£. At a spot price of $1.45/£, the call option has:
an intrinsic value of $0.00.
The U.S. dollar suddenly changes in value against the euro moving from an exchange rate of 0.8909/€ to $0.8709/€. Thus, the dollar has ________ by ________.
appreciated; 2.30%
The ________ approach argues that exchange rates are determined by the supply and demand for a wide variety of financial assets
asset market
The ________ approach to the determination of spot exchange rates hypothesizes that the most important factors are the relative real interest rate and a country's outlook for economic growth and profitability.
asset market
An option whose exercise price is equal to the spot rate is said to be:
at-the-money
The ________ approach argues that equilibrium exchange rates are achieved when the net inflow of foreign exchange arising from current account activities is equal to the net outflow of foreign exchange arising from financial account activities.
balance of payments
The ________ provides a means to account for international cash flows in a standardized and systematic manner.
balance of payments
The principle focus of the IMF bailout efforts during the Asian financial crisis was:
banking liquidity
Your U.S firm has an accounts payable denominated in UK pounds due in 6 months. To protect yourself against unexpected changes in the dollar/pound exchange rate you should:
buy a pound call option
If the goal were to increase the value of a country's currency — to fight an depreciation of the domestic currency in exchange for foreign currency — the central bank would:
buy its own currency in exchange for foreign currency.
Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ 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.
buy yen; the forward rate
A speculator in the futures market wishing to lock in a price at which they could ________ a foreign currency will ________ a futures contract.
buy; buy
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 ________.
buying yen for ¥128.53/$; selling yen at ¥128.00/$
Question 170 / 1 point 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.
call, buy, put, sell
________ is the restriction of access to foreign currency by government.
capital controls
An 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.
complementary; competing
The "tequila effect" is a slang term used to describe a form of financial panic called:
contagion
________ is defined as the spread of a crisis in one country to its neighboring countries and other countries with similar characteristics
contagion
The potential exposure that any individual firm bears that the second party to any financial contract will be unable to fulfill its obligations under the contract is called:
counterparty risk
________ is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit. ________ is the risk of changes in interest rates charged at the time a financial contract rate is set.
credit risk; repricing risk
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:
cronyism
An agreement to swap the currencies of a debt service obligation would be termed a/an:
currency swap
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
The single largest interest rate risk of a firm is:
debt service.
The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to:
do nothing
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. •Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. •Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% •Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.Refer to Instruction 8.1. Choosing strategy #2 will:
eliminate credit risk but retain repricing risk.
The Rho of an option is defined as:
expected change in the option premium for a small change in the domestic interest rate.
The Phi of an option is defined as:
expected change in the option premium for a small change in the foreign interest rate.
The Delta of an option is defined as:
expected change in the option premium for a small change in the spot rate.
The Theta of an option is defined as:
expected change in the option premium for a small change in time to expiration.
The Lambda of an option is defined as:
expected change in the option premium for a small change in volatility.
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.
exporters; importers
Prior to July 2, 1997, the Thai government:
fixed the Bhat's value against major currencies especially the U.S. dollar.
Critics of the balance of payments approach to exchange rate determination point to the emphasis on ________ of currency and capital rather than ________ of money or financial assets.
flows; stocks
________ are agents who facilitate trading between dealers without themselves becoming principals in the transaction
foreign exchange brokers
The ________ is the mechanism by which participants transfer purchasing power between countries, obtain or provide credit for international trade transactions, and minimize exposure to the risks of exchange rate changes.
foreign exchange market
A/An ________ is an agreement between a buyer and seller that a fixed amount of one currency will be delivered at a specified rate for some other currency.
foreign exchange transaction
A ________ transaction in the foreign exchange market requires delivery of foreign exchange at some future date.
forward
An interbank-traded contract to buy or sell interest rate payments on a notional principal is called a/an:
forward rate agreement.
A foreign currency ________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, place, and price.
futures
A call option whose exercise price is less than the spot price is said to be:
in-the-money
Option premiums deteriorate at a/an ________ as they approach expiration.
increasing rate
________ is the alteration of economic or financial fundamentals that are thought to be drivers of capital to flow in and out of specific currencies.
indirect intervention
A/an ________ quote in the United States would be foreign units per dollar, while a/an ________ quote would be in dollars per foreign currency unit.
indirect; direct
The authors identify two tiers of foreign exchange markets:
interbank and client markets.
A/an ________ is a contract to lock in today interest rates over a given period of time.
interest rate future
An agreement to exchange interest payments based on a fixed payment for those based on a variable rate (or vice versa) is known as a/an:
interest rate swap
An agreement to swap a fixed interest payment for a floating interest payment would be considered a/an:
interest rate swap
The ________ of an option is the value if the option were to be exercised immediately. It is the option's ________ value.
intrinsic value; minimum
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.
low; high
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. •Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. •Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% •Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.
maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks.
Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit is called a:
margin
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.
monetary
The ________ is a derivative forward contract that was created in the 1990s. It has the same characteristics and documentation requirements as traditional forward contracts except that they are only settled in U.S. dollars and the foreign currency involved in the transaction is not delivered.
nondeliverable forward
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.
option
A call option whose exercise price exceeds the spot price is said to be:
out-of-the-money
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 ________.
over-the-counter; exchange markets
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.
overvalued
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:
overvalued
A firm with variable-rate debt that expects interest rates to rise may engage in a swap agreement to:
pay fixed-rate interest and receive floating rate interest
A firm with fixed-rate debt that expects interest rates to fall may engage in a swap agreement to:
pay floating rate and receive fixed rate.
The ________ is the Argentine currency unit.
peso
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. •Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. •Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% •Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.Refer to Instruction 8.1. Choosing strategy #1 will:
preclude the possibility of sharing in lower interest rates over the three-year period.
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.)
premium; 2.09%
A foreign exchange ________ is the price of one currency expressed in terms of another currency. A foreign exchange ________ is a willingness to buy or sell at the announced rate.
rate; quote
________ 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.
relative purchasing power parity
Individual borrowers - whether they be governments or companies - possess their own individual credit rating, the market's assessment of their ability to repay debt in a timely manner. These credit assessments influence all the following EXCEPT:
risk-free rate
The financial manager of a firm has a variable rate loan outstanding. If she wishes to protect the firm against an unfavorable increase in interest rates she could:
sell an interest rate futures contract of a similar maturity to the loan.
If the goal were to decrease the value of a country's currency — to fight an appreciation of the domestic currency in exchange for foreign currency — the central bank would:
sell its own currency in exchange for foreign currency.
Traders who believe volatilities will fall significantly in the near-term will:
sell options now
A forward contract to deliver British pounds for U.S. dollars could be described either as ________ or ________.
selling pounds forward; buying dollars forward
A speculator that has ________ a futures contract has taken a ________ position.
sold; short
Financial derivatives are powerful tools that can be used by management for purposes of:
speculation and hedging
________ 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
In the foreign exchange market, ________ seek all of their profit from exchange rate changes while ________ seek to profit from simultaneous exchange rate differences in different markets.
speculators; arbitrageurs
A ________ transaction in the foreign exchange market requires an almost immediate delivery (typically within two days) of foreign exchange.
spot
Volatility is viewed the following ways EXCEPT:
spot
The price at which an option can be exercised is called the:
strike price
________ is NOT one of the three categories reported for foreign exchange.
strip transactions
A ________ transaction in the interbank market is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.
swap
The greatest volume of daily foreign exchange transactions are:
swap transactions
________, traditionally referred to as chartists, focus on price and volume data to determine past trends that are expected to continue into the future.
technical analysts
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. •Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. •Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% •Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.Refer to Instruction 8.1. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #3 is: (Assume your firm is borrowing money.)
that interest rates might go up or that your credit rating might get worse.
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. •Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. •Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% •Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.Refer to Instruction 8.1. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #2 is: (Assume your firm is borrowing money.)
that interest rates might go up or that your credit rating might improve.
Which of the following was NOT an international currency crisis in the 1990s and early 2000s?
the Canadian Crisis
Exchange rate pass-through may be defined as:
the degree to which the prices of imported and exported goods change as a result of exchange rate changes.
Examples of a business motivation for long-run exchange rate forecasts include all but which of the following?
the desire to hedge a 90-day security
Short-term foreign exchange forecasts are often motivated by such activities as ________ whereas long-term forecasts are more likely motivated by ________.
the desire to hedge a payable; the desire for long-term investment
The value of a European style call option is the sum of two components:
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:
the law of one price
The authors did NOT identify which of the following as a root of the Asian currency crisis?
the rate of inflation in the U.S.
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:
under priced
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:
undervalued
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:
undervalued
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/$1. Thus, according to PPP and the Law of One Price, at the current exchange rate the peso is:
undervalued; approximately 21%
Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ 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 ________.
unlimited; $100,000
The maximum gain for the purchaser of a call option contract is ________ while the maximum loss is ________.
unlimited; the premium paid
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/$
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.
£15,721
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 U.S. for $55,000 which is the UK price multiplied by the current exchange rate of $2.01/£. Jaguar has committed to keeping the U.S. price at $55,000 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $2.15/£, and Jaguar has not hedged against currency changes, what is the amount the company will receive in pounds at the new exchange rate?
£25,581
Given the following exchange rates, which of the multiple-choice choices represents a potentially profitable intermarket arbitrage opportunity?¥129.87/$€1.1226/$€0.00864/¥
¥114.96/€
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 $2.54 in the United States and 294 yen in Japan, what is the estimated exchange rate of yen per dollar as hypothesized by the Hamburger index?
¥115.75/$
A put option on yen is written with a strike price of ¥105.00/$. Which spot price maximizes your profit if you choose to exercise the option before maturity?
¥115/$
Refer to Table 5.1. The one-month forward bid price for dollars as denominated in Japanese yen is:
¥129.62/$.
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 = $1.2194/€. Therefore, the euro/pound rate must be:
€1.2719/£.
A major U.S. multinational firm has forecast the euro/dollar rate to be €1.10/$ one year hence, and an exchange rate of $1.40 for the British pound (£) in the same time period. What does this imply the company's expected rate for the euro per pound to be in one year?
€1.54/£
