FINA 6876 Exam 2 Quiz Answers
According to the IFE, when the nominal interest rate at home exceeds the nominal interest rate in the foreign country, the home currency should depreciate. a. True b. False
a. True
A call option on British pounds (₤) exists with a strike price of $1.56 and a premium of $.08 per unit. Another call option on British pounds has a strike price of $1.59 and a premium of $.06 per unit. If the British pound spot rate is $1.58 at option expiration, what is the total profit or loss for the bullspread (31,250 units)? a. $0 b. $375 c. $625 d. $875
a. $0 $1.58 - $1.56 - $0.08 + $0.06 = $0.00 * 31,250 = $0.00
A call option on British pounds (₤) exists with a strike price of $1.56 and a premium of $.08 per unit. Another call option on British pounds has a strike price of $1.59 and a premium of $.06 per unit. What is the maximum profit of this bullspread? What is the maximum loss? a. $0.01 and $0.02 b. $0.02 and $0.01 c. $0.01 and $0.04 d. $0.04 and $0.01
a. $0.01 and $0.02 The maximum gain for the bullspread is limited to the difference between the strike prices less the difference in the premiums, or $.01 = ($1.59 - $1.56) - ($.08 - $.06). The maximum loss for the bullspreader limited to the difference in the option premiums, or $.02.
Assume the following options are currently available for British pounds (₤): • Call option premium on British pounds = $.04 per unit • Put option premium on British pounds = $.03 per unit • Call option strike price = $1.56 • Put option strike price = $1.53 • One option contract represents ₤31,250. Determine the break-even point(s) for a long strangle. a. $1.46 and $1.63 b. $1.46 and $1.67 c. $1.38 and $1.63 d. $1.38 and $1.67
a. $1.46 and $1.63 The break-even points for a strangle are located below the lower exercise price and above the higher exercise price.The lower break-even point is located at $1.46 = $1.53 - ($.04 + $.03).The higher break-even point is located at $1.63 = $1.56 + ($.04 + $.03).
The three-month 90-strike put is priced at $2 and the three-month 100-strike put is priced at $7. What is the maximum possible net payoff on a bearish spread using these options? a. $5 b. $7 c. $8 d. $10
a. $5 The bearish vertical spread has a long position in the 100-strike put and a short position in the 90-strike put. The premium paid is net $5. At maturity the net payoff is max (x1 - s, 0) + p1+ max (x2 - s, 0) - p2 . So, when s = 90 for example, this is maximized, and has a value of $8. That is: =MAX(90 - 90,0) + 2+ MAX(100-90,0) -7 = 5
Two British pound (₤) put options are available with exercise prices of $1.60 and $1.62. The premiums associated with these options are $.03 and $.04 per unit, respectively. At option expiration, the spot rate of the pound is $1.60. What is a bullspreader's potential total gain or loss (Assume each option contract is for 31,250 units)? a. -$312.50 b. -$375.00 c. $312.50 d. $375.00
a. -$312.50 $1.60 - $1.62 - $0.03 + $0.04 = -$0.01 * 31,250 units = -$312.50
Assume that the interest rate offered on pounds is 5% and the pound is expected to depreciate by 1.5%. For the international Fisher effect (IFE) to hold between the U.K. and the U.S., the U.S. interest rate should be ____. a. 6.5% b. 5.68% c. 3.43% d. 7.3%
a. 3.43% (1 + .05) × (1 + .015) − 1 = 3.43%
Lorre Company needs 200,000 Canadian dollars (C$) in 90 days and is trying to determine whether or not to hedge this position. Lorre has developed the following probability distribution for the Canadian dollar: Possible value of Canadian Dollar in 90 Days: $0.54, $0.57, $0.58, $0.59 Probability: 15%, 25%, 35%, 25% The 90-day forward rate of the Canadian dollar is $.575, and the expected spot rate of the Canadian dollar in 90 days is $.55. If Lorre implements a forward hedge, what is the probability that hedging will be more costly to the firm than not hedging? a. 40%. b. 60%. c. 15%. d. 85%.
a. 40%. Since Lorre locks into the $.575 with a forward contract, the first two cases would have been cheaper had Lorre not hedged (15% + 25% = 40%).
Company X wants to borrow $10,000,000 floating for 1 year; company Y wants to borrow £5,000,000 fixed for 1 year. The spot exchange rate is $2 = £1 and IRP calculates the one-year forward rate as $2.00×(1.08)/£1.00×(1.06) = $2.0377/£1. Their external borrowing opportunities are: (Company X, Company Y) Borrowing Cost($): $8%, $9% Borrowing Cost(Pounds): 7%, 6% A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap. In order for X and Y to be interested, they can face no exchange rate risk. What must the values of A and B in the graph shown above be in order for the swap to be of interest to firms X and Y? a. A = £7%; B = $9%. b. A = $8%; B = £6%. c. A = $7%; B = £7%. d. A = $8%; B = £8%.
a. A = £7%; B = $9%. X wants to borrow dollars, so without the swap, it would pay $8%; Y wants to borrow pounds, so without the swap, it would pay £6%. X can borrow externally at £7% and enter a swap contract where it pays the bank $7.5% and receive £7%; this will cancel out the £7% loan so that X pays a dollar loan (e.g. $7.5%). Since Y can borrow externally at $9% but wants to borrow £, the bank can pay Y $9% in exchange for e.g. £5.5%. This will cancel out the $9% rate loan so that Y is left with a £-loan of, say, £5.5%.
Which of the following is not true regarding IRP, PPP, and the IFE? a. IRP suggests that a currency's spot rate will change according to interest rate differentials. b. PPP suggests that a currency's spot rate will change according to inflation differentials. c. The IFE suggests that a currency's spot rate will change according to interest rate differentials. d. All of the above are true.
a. IRP suggests that a currency's spot rate will change according to interest rate differentials.
In which case will locational arbitrage most likely be feasible? a. One bank's ask price for a currency is greater than another bank's bid price for the currency. b. One bank's bid price for a currency is greater than another bank's ask price for the currency. c. One bank's ask price for a currency is less than another bank's ask price for the currency. d. One bank's bid price for a currency is less than another bank's bid price for the currency.
b. One bank's bid price for a currency is greater than another bank's ask price for the currency.
An option writer is the seller of a call or put option a. True b. False
a. True
For points lying to the left of the interest rate parity (IRP) line, covered interest arbitrage is not possible from a U.S. investor's perspective, but is possible from a foreign investor's perspective. a. True b. False
a. True
If a firm is hedging payables with futures contracts, it may end up paying more for the payable than it would have had it remained unhedged if the foreign currency depreciates. a. True b. False
a. True
If an investor who has previously purchased a futures contract wishes to liquidate her position, she would sell an identical futures contract with the same settlement date. a. True b. False
a. True
Locational arbitrage explains why prices among banks at different locations will not normally differ by a significant amount. a. True b. False
a. True
The hedging of a foreign currency for which no forward contract is available with a highly correlated currency for which a forward contract is available is referred to as cross-hedging. a. True b. False
a. True
Assume that the inflation rate in Singapore is 3%, while the inflation rate in the U.S. is 8%. According to PPP, the Singapore dollar should ____ by ____%. a. appreciate; 4.85 b. depreciate; 3,11 c. appreciate; 3.11 d. depreciate; 4.85
a. appreciate; 4.85 (1.08/1.03) − 1 = 4.85%.
Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the: a. larger will be the forward discount of the foreign currency. b. larger will be the forward premium of the foreign currency. c. smaller will be the forward premium of the foreign currency. d. smaller will be the forward discount of the foreign currency.
a. larger will be the forward discount of the foreign currency.
If your firm expects the euro to substantially depreciate, it could speculate by ____ euro call options or ____ euros forward in the forward exchange market. a. selling; selling b. selling; purchasing c. purchasing; purchasing d. purchasing; selling
a. selling; selling
A major risk faced by a swap dealer is credit risk. This is a. the probability that a counterparty will default. b. the probability that both counterparties default. c. the probability floating rates will move against the dealer. d. none of the above
a. the probability that a counterparty will default.
When the futures price is above the forward rate, astute investors may attempt to simultaneously buy a currency forward and sell futures in that currency. These actions would place ____ pressure on the forward rate and ____ pressure on the futures rate. a. upward; downward b. upward; upward c. downward; upward d. downward; downward
a. upward; downward
Assume the following information: (quoted bid price, quoted ask price) Value of an Australian Dollar in $: $0.67, $0.69 Value of Mexican Peso in $: $0.074, $0.077 Value of an Australian Dollar in Mexican Pesos: 8.2, 8.5 Assume you have $100,000 to conduct triangular arbitrage. What will be your profit from implementing this strategy? a. $6,133 b. $2,368 c. $6,518 d. $13,711
b. $2,368 $100,000/$.077 = 1,298,701 pesos/8.5 = A$152,788 × $0.67 = $102,368 Profit = $102,368 − $100,000
Assume that one year ago, the spot rate of the British pound was $1.70. One year ago, the one-year futures contract of the British pound exhibited a discount of 6%. At that time, you sold futures contracts on pounds, representing a total of 1,000,000 pounds. From one year ago to today, the pound's value depreciated against the dollar by 4 percent. Determine the total dollar amount of your profit or loss from your futures contract. a. $34,000 b. -$34,000 c. $45,341 d. -$45,341
b. -$34,000 Spot rate 1 year ago = $1.70Forward rate 1 year ago = $1.70 x (1- .06) = $1.598Dollars received for 1,000,000 pounds = 1,000,000 x $1.598 = $1,598,000.Spot rate of pound today = 4% less than 1 year ago = $1.70 x (1- .04) = $1.632Dollars that are now required to buy the 1,000,000 pounds = 1,000,000 x $1.632 = $1,632,000Net Profit = $1,598,000 - $1,632,000 = -$34,000
Exhibit 7-1 Assume the following information: You have $300,000 to invest:The spot bid rate for the euro (€) is $1.08The spot ask quote for the euro is $1.10The 180-day forward rate (bid) of the euro is $1.08The 180-day forward rate (ask) of the euro is $1.10The 180-day interest rate in the U.S. is 6%The 180-day interest rate in Europe is 8%Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what is your percentage return after 180 days? Is covered interest arbitrage feasible in this situation? a. 7.96%; feasible b. 6.04%; feasible c. 6.04%; not feasible d. 4.07%; not feasible e. 10.00%; feasible
b. 6.04%; feasible $318,109.10/$300,000 − 1 = 6.04%. Since this rate is slightly higher than the U.S. interest rate of 6%, covered interest arbitrage is feasible.
A futures hedge involves taking a money market position to cover a future payables or receivables position. a. True b. False
b. False
According to the international fisher effect (IFE), the exchange rate percentage change should be approximately equal to the differential in income levels between two countries. a. True b. False
b. False
Hedging the position of individual subsidiaries is generally necessary, even if the overall performance of the MNC is already insulated by the offsetting positions between subsidiaries. a. True b. False
b. False
If an MNC assesses net transaction exposure, this refers to the consolidation of all expected inflows for a particular time and currency. a. True b. False
b. False
If an MNC is hedging various currencies, it should measure the real cost of hedging in each currency as a dollar amount for comparison purposes. a. True b. False
b. False
If interest rate parity (IRP) exists, then the rate of return achieved from covered interest arbitrage should be equal to the rate available in the foreign country. a. True b. False
b. False
If interest rate parity exists, then the rate of return achieved from covered interest arbitrage should be equal to the interest rate available in the foreign country. a. True b. False
b. False
If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible. a. True b. False
b. False
The IFE theory suggests that foreign currencies with relatively high interest rates will appreciate because the high nominal interest rates reflect expected inflation. a. True b. False
b. False
The price of a futures contract will generally vary significantly from that of a forward contract. a. True b. False
b. False
With a bull spread, the spreader believes that the underlying currency will appreciate substantially, even more so than with a strangle. a. True b. False
b. False
If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the ____ hedge. a. put option b. forward c. call option d. none of the above
b. forward
Assume the following information for a bank quoting on spot exchange rates: Exchange rate of Singapore dollar in U.S. $=$.60 Exchange rate of pound in U.S. $=$1.50 Exchange rate of pound in Singapore dollars=S$2.6 Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates? a. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate. b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate. c. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate. d. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.
b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown below: (Company X, Company Y) Fixed-Rate Borrowing Cost: 10%, 12% Floating Rate Borrowing Cost: LIBOR, LIBOR+ 1.5% A swap bank proposes the following interest-only swap:X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR - 0.15%; in exchange, the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90%. Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30% and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR - 0.15%. What is the value of this swap to the swap bank? a. The swap bank will lose money on the deal. b. The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year. c. The swap bank will break even. d. None of the above
b. The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year. With the swap, X pays the bank LIBOR - 0.15% and gets 9.90% With the swap, Y pays the bank 10.30% and gets LIBOR - 0.15%. Therefore Bank gets = (LIBOR - 0.15%) - 9.9% + 10.3% - (LIBOR - 0.15%) = LIBOR - 0.15% - 9.9% + 10.3% - LIBOR + 0.15% = 0.4% Hence, the bank makes 40 basis points on $10,000,000 = 0.40%*$10,000,000 = $40,000
If nominal British interest rates are 3% and nominal U.S. interest rates are 6%, then the British pound (£) is expected to ____ by about ____%, according to the international Fisher effect (IFE). a. depreciate; 2.9 b. appreciate; 2.9 c. depreciate; 1.0 d. appreciate; 1.0 e. none of the above
b. appreciate; 2.9 (1.06/1.03) − 1 = 2.9%.
Johnson, Inc., a U.S.-based MNC, will need 10 million Thai baht on August 1. It is now May 1. Johnson has negotiated a non-deliverable forward contract with its bank. The reference rate is the baht's closing exchange rate (in $) quoted by Thailand's central bank in 90 days. The baht's spot rate today is $.02. If the rate quoted by Thailand's central bank on August 1 is $.022, Johnson will ____ $____. a. pay; 20,000 b. be paid; 20,000 c. pay; 2,000 d. be paid; 2,000 e. none of the above
b. be paid; 20,000 Amount received per unit = $.022 − $.02 = $.002 × THB10,000,0000 = $20,000.
If the observed put option premium is less than what is suggested by the put-call parity equation, astute arbitrageurs could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency. a. selling; buying; buying b. buying; selling; buying c. selling; buying; selling d. buying; buying; buying
b. buying; selling; buying
Assume that Cooper Co. will not use its cash balances in a money market hedge. When deciding between a forward hedge and a money market hedge, it ____ determine which hedge is preferable before implementing the hedge. It ____ determine whether either hedge will outperform an unhedged strategy before implementing the hedge. a. can; can b. can; cannot c. cannot; can d. cannot; cannot
b. can; cannot
According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries: a. follows their exchange rate movement. b. is due to their inflation differentials. c. is zero. d. is constant over time. e. C and D
b. is due to their inflation differentials.
A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put option can be referred to as: a. in the money. b. out of the money. c. at the money. d. at a discount.
b. out of the money.
The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound: Regression results indicate that a0 = 0 and a1 = 0.4. Therefore: a. purchasing power parity holds. b. purchasing power parity overestimated the exchange rate change during the period under examination. c. purchasing power parity underestimated the exchange rate change during the period under examination. d. purchasing power parity will overestimate the exchange rate change of the British pound in the future.
b. purchasing power parity overestimated the exchange rate change during the period under examination.
If you have bought the right to sell, you are a: a. call writer. b. put buyer. c. futures buyer. d. put writer.
b. put buyer.
Frank is an option speculator. He anticipates the Danish kroner to appreciate from its current level of $.19 to $.21. Currently, kroner call options are available with an exercise price of $.18 and a premium of $.02. Should Frank attempt to buy this option? If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit? a. no; −$0.01. b. yes; $0.01. c. yes; −$0.01. d. yes; $0.03.
b. yes; $0.01. The net profit per unit is: $.21 − $.18 − $.02 = $.01.
Andrea is an option speculator. She anticipates the Canadian dollar to depreciate from its current level of $0.90 to $0.85. Currently, Canadian dollar call options are available with an exercise price of $0.91 and a premium of $0.02. Also, Canadian dollar put options are available with an exercise price of $0.88 and a premium of $0.02. If the future spot rate of the Canadian dollar is $0.85, what is Andrea's profit or loss per unit? a. $0.03 b. $0.05 c. $0.01 d. $0.04
c. $0.01
A call option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.03 per unit. A put option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be $1.57 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium. a. $1,169,000. b. $1,099,000. c. $1,106,000. d. $1,143,100. e. $1,134,000.
c. $1,106,000. ($1.60 − $.02) × £700,000 = $1,106,000
Assume the following information: U.S. deposit rate for 1 year=11% U.S. borrowing rate for 1 year=12% Swiss deposit rate for 1 year=8% Swiss borrowing rate for 1 year=10% Swiss forward rate for 1 year=$.40 Swiss franc spot rate=$.39 Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year.Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a forward hedge? a. $234,000. b. $238,584. c. $240,000. d. $236,127.
c. $240,000. SF600,000 × $.40 = $240,000
Money Corp. frequently uses a forward hedge to hedge its Malaysian ringgit (MYR) receivables. For the next month, Money has identified its net exposure to the ringgit as being MYR1,500,000. The 30-day forward rate is $.23. Furthermore, Money's financial center has indicated that the possible values of the Malaysian ringgit at the end of next month are $.20 and $.25, with probabilities of .30 and .70, respectively. Based on this information, the revenue from hedging minus the revenue from not hedging receivables is____. a. $0. b. −$7,500. c. $7,500. d. none of the above
c. $7,500. (MYR1,500,000 × $0.20) − (MYR1,500,000 × $0.23) = −$45,000 RCH(2)= (MYR1,500,000 × $0.25) − (MYR1,500,000 × $0.23) = $30,000 E[RCH]= (.30)(−45,000) + (.7)(30,000) = 7,5000
The forward rate of the Swiss franc is $.50. The spot rate of the Swiss franc is $.48. The following interest rates exist: U.S. 360-day borrowing rate: 7% 360-day deposit rate: 6% Switzerland 360-day borrowing rate: 5% 360-day deposit rate: 4% You need to purchase SF200,000 in 360 days. If you use a money market hedge, the amount of dollars you need in 360 days is: a. $101,904. b. $101,923. c. $98,770. d. $96,914. e. $92,307.
c. $98,770. 1.Need to invest SF192,308 (SF200,000/1.04) = SF192,308. 2.Need to borrow $92,308 to exchange for SF192,308 (SF192,308 × $.48) = $92,308. 3.At the end of 360 days, need $98,769 to repay the loan ($92,308 × 1.07) = $98,770.
Assume that the U.S. one-year interest rate is 3% and the one-year interest rate on Australian dollars is 6%. The U.S. expected annual inflation is 5%, while the Australian inflation is expected to be 7%. You have $100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of an Australian dollar is $0.689. What will be the yield on your investment if you invest in the Australian market? a. 6% b. 3% c. 4% d. 2%
c. 4% (1 + .05)/(1 + .07) × $0.689 = $0.676. ($100,000/A$0.689) × (1 + .06) = A$153,846 × $0.676 = $104,000. ($104,000 − $100,000)/$100,000 = 4%
The 180-day forward rate for the euro is $1.34, while the current spot rate of the euro is $1.29. What is the annualized forward premium or discount of the euro? a. 7.46% premium b. 7.46% discount c. 7.75% premium d. 7.75% discount
c. 7.75% premium [(F/S) − 1] × 360/180 = [($1.34/$1.29) − 1] × 360/180 = 7.75%
Suppose you are short a call and long a put on the S&P 500 index with the same strike and same maturity. Then, you are essentially holding a. A long forward on the S&P 500 index b. A long straddle on the S&P 500 index c. A short forward on the S&P 500 index d. A short straddle on the S&P 500 index
c. A short forward on the S&P 500 index
Which of the following is not true regarding covered interest arbitrage? a. Covered interest arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount. b. Covered interest arbitrage involves investing in a foreign country and covering against exchange rate risk. c. Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country. d. If covered interest arbitrage is possible, you can guarantee a return on your funds that exceeds the returns you could achieve domestically. e. All of the above are true regarding covered interest arbitrage.
c. Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country.
A swap bank makes the following quotes for 5-year swaps and AAA-rated firms: USD: Bid (5%) Ask (5.2%) Euro: Bid (7%) Ask (7.2%) a. The bank stands ready to pay $5.2% against receiving dollar LIBOR on 5-year loans. b. The bank stands ready to receive €7% against receiving dollar LIBOR on 5-year loans. c. The bank stands ready to pay €7% against receiving dollar LIBOR on 5-year loans. d. None of the above
c. The bank stands ready to pay €7% against receiving dollar LIBOR on 5-year loans. As it relates to bid and ask prices, the bank "ask" investors to pay the higher rate. Hence, the bank will pay $5% or €7% and will collect $5.2% or €7.2% from investors. Hence, only option C fits!
Assume that interest rate parity holds. The Mexican interest rate is 50%, and the U.S. interest rate is 8%. Subsequently, the U.S. interest rate decreases to 7%. According to interest rate parity, the peso's forward ____ will ____. a. premium; increase b. discount; decrease c. discount; increase d. premium; decrease
c. discount; increase
According to the international Fisher effect, if Venezuela has a much higher nominal rate than other countries, its inflation rate will likely be ____ than other countries, and its currency will ____. a. lower; strengthen b. lower; weaken c. higher; weaken d. higher; strengthen
c. higher; weaken
Which of the following theories suggests the percentage change in spot exchange rate of a currency should be equal to the interest rate differential between two countries? a. absolute form of PPP. b. relative form of PPP. c. international Fisher effect (IFE). d. interest rate parity (IRP).
c. international Fisher effect (IFE).
Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts ____ pressure on the pound's spot rate, and ____ pressure on the pound's forward rate. a. downward; downward b. downward; upward c. upward; downward d. upward; upward
c. upward; downward
Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the ringgit. What will be the profit for an investor that has $500,000 available to conduct locational arbitrage? a. $2,041,667 b. $9,804 c. $500 d. $1,639
d. $1,639
A call option on British pounds (₤) exists with a strike price of $1.56 and a premium of $.08 per unit. Another call option on British pounds has a strike price of $1.59 and a premium of $.06 per unit. What is the breakeven point for this bullspread? a. $1.52 b. $1.54 c. $1.56 d. $1.58
d. $1.58 The breakeven point of a bullspread occurs at the lower exercise price plus the difference in premiums, at $1.58 = $1.56 + ($.08 - $.06)
Karen Hawthorne is a currency speculator. She has noticed recently that the euro has appreciated substantially against the U.S. dollar. The current exchange rate of the euro is $1.15. After reading a variety of articles on the subject, she believes that the euro will continue to fluctuate substantially in the months to come. Although most forecasters believe that the euro will depreciate against the dollar in the near future, Karen thinks that there is also a good possibility of further appreciation. Currently, a call option on euros is available with an exercise price of $1.17 and a premium of $.04. A euro put option with an exercise price of $1.17 and a premium of $.03 is also available. At option expiration, the value of the euro is $1.30. What is Karen's total profit or loss from a long straddle position (each option contract is for 62,500 units)? a. -$3,125 b. -$3,750 c. $3,125 d. $3,750
d. $3,750 $1.30 - $1.17 - $0.04 - $0.03 = $0.06 * 62,500 units = $3,750
One year ago, you sold a put option on 100,000 euros with an expiration date of one year. You received a premium on the put option of $.04 per unit. The exercise price was $1.22. Assume that one year ago, the spot rate of the euro was $1.20, the one-year forward rate exhibited a discount of 2%, and the one-year futures price was the same as the one-year forward rate. From one year ago to today, the euro depreciated against the dollar by 4 percent. Today the put option will be exercised (if it is feasible for the buyer to do so).Determine the total dollar amount of your profit or loss from your position in the put option.Now assume that instead of taking a position in the put option one year ago, you sold a futures contract on 100,000 euros with a settlement date of one year. Determine the total dollar amount of your profit or loss. a. (i.) $2,600 and (ii.) $2,200 b. (i.) $2,600 and (ii.) $2,400 c. (i.) $2,800 and (ii.) $2,200 d. (i.) $2,800 and (ii.) $2,400
d. (i.) $2,800 and (ii.) $2,400 (i.) The spot rate depreciated from $1.20 to $1.152.The loss on the put option per unit is $1.152 - $1.22 + $.04 = -$.028.Total loss = $.028 x 100,000 = $2,800. (ii.) The forward rate one year ago was equal to: $1.20 x (1 - .02) = $1.176.So the futures rate is $1.176.The gain per unit is $1.176 - $1.152 = $.024total gain is $.024 x 100,000 = $2,400.
The US swap market convention, that is used to compute the fixed payments in a USD swap, is a. Actual/365. b. Actual/360. c. Actual/Actual. d. 30/360.
d. 30/360.
Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown below: Fixed-Rate Borrowing Cost: 10%, 12% Floating Rate Borrowing Cost: LIBOR, LIBOR+ 1.5% A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10.05%-10.45% against LIBOR flat. Assume both X and Y agree to the swap bank's terms. Fill in the values for A, B, C, D, E, & F on the diagram. a. A = LIBOR; B = 10.45%; C =10.05%; D = LIBOR; E = LIBOR; F = 12% b. A = 10%; B = 10.45%; C =10.05%; D = LIBOR; E = LIBOR; F = LIBOR + 1½% c. A = 10%; B = 10.45%; C = LIBOR; D = LIBOR; E = 10.05%; F = LIBOR + 1½% d. A = 10%; B = LIBOR; C = LIBOR; D = 10.45%; E = 10.05%; F = LIBOR + 1½%
d. A = 10%; B = LIBOR; C = LIBOR; D = 10.45%; E = 10.05%; F = LIBOR + 1½% X wants to borrow floating, so without the swap, it would pay LIBOR; Y wants to borrow fixed, so without the swap, it would pay 12%. Given the answers choices, X can borrow externally fixed at 10%, and enter a swap contract where it pays the bank LIBOR and receive 10.05%; this will cancel out the 10% fixed loan so that X pays LIBOR - 0.05%. Since, Y can borrow externally at LIBOR + 1.5%, but want to be fixed, the bank can pay Y LIBOR in exchange for 10.45%. this will cancel out the floating rate loan, so that Y is left with a fixed rate = LIBOR - 10.45% - (LIBOR + 1.5%) = 11.95%
You are long an at-the-money straddle on a currency index. Which of the following statements is valid? a. Your position increases in value if, ceteris paribus, the index rises. b. Your position increases in value if, ceteris paribus, the index falls. c. Your position increases in value if, ceteris paribus, the volatility of the index rises. d. All of the above.
d. All of the above.
Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown below: (Company X, Company Y) Fixed-Rate Borrowing Cost: 10%, 12% Floating Rate Borrowing Cost: LIBOR, LIBOR+ 1.5% A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR - 0.15%; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90%. What is the value of this swap to company X? a. Company X will lose money on the deal. b. Company X will save 25 basis points per year on $10,000,000 = $25,000 per year. c. Company X will only break even on the deal. d. Company X will save 5 basis points per year on $10,000,000 = $5,000 per year.
d. Company X will save 5 basis points per year on $10,000,000 = $5,000 per year. X wants to borrow floating, so without the swap, it would pay LIBOR. However, it can use the swap to transform a fixed-rate loan into a floating-rate loan. X can borrow at 10% (fixed). With swap, X pays LIBOR - 0.15% and gets 9.90%. Therefore X pays = -10% - (LIBOR - 0.15%) + 9.9% = -10% - LIBOR + 0.15% + 9.9% = - 10% +10.05% - LIBOR = 0.05% - LIBOR à this is 5 basis points lower than borrowing at LIBOR Hence, it saves 5 basis points on $10,000,000 = 0.05%*$10,000,000 = $5,000
Assume the following information: Current spot rate of New Zealand dollar=$.41Forecasted spot rate of New Zealand dollar 1 year from now=$.43One-year forward rate of the New Zealand dollar=$.42Annual interest rate on New Zealand dollars=8%Annual interest rate on U.S. dollars=9% Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%. a. about 11.97 b. about 9.63 c. about 11.12 d. about 11.64 e. about 10.63
e. about 10.63 $500,000/$.41= NZ$1,219,512 × (1.08) = NZ$1,317,073 × .42 = $553,171 Yield = ($553,171 − $500,000)/$500,000 = 10.63%
The term interest rate swap a. refers to a "single-currency interest rate swap" shortened to "interest rate swap". b. involves "counterparties" who make a contractual agreement to exchange cash flows at periodic intervals. c. can be "fixed-for-floating rate" or "fixed-for-fixed rate". d. all of the above
d. all of the above
Among the reasons that purchasing power parity (PPP) does not consistently occur are: a. exchange rates are affected by interest rate differentials. b. exchange rates are affected by national income differentials and government controls. c. supply and demand may not adjust if no substitutable goods are available. d. all of the above are reasons that PPP does not consistently occur.
d. all of the above are reasons that PPP does not consistently occur.
The ____ the existing spot price relative to the strike price, the ____ valuable the put options will be. a. higher; less b. higher; more c. lower; less d. lower; more
d. lower; more
Given a home country and a foreign country, the international Fisher effect (IFE) suggests that: a. the nominal interest rates of both countries are the same. b. the inflation rates of both countries are the same. c. the exchange rates of both countries will move in a similar direction against other currencies. d. none of the above
d. none of the above
Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be: a. positive. b. negative. c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount. d. zero.
d. zero.
Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect, the franc will ____ by about ____. a. appreciate; 3% b. appreciate; 1% c. depreciate; 3% d. depreciate; 2% e. appreciate; 2%
e. appreciate; 2%
From the perspective of Detroit Co., which has payables in Mexican pesos and receivables in Canadian dollars, hedging the payables would be most desirable if the expected real cost of hedging payables is ____, and hedging the receivables would be most desirable if the expected real cost of hedging receivables is ____. a. negative; positive b. zero; positive c. zero; zero d. positive; negative e. negative; negative
e. negative; negative
You purchase a put option on Swiss francs for a premium of $.02, with an exercise price of $.61. The option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $.58, your net profit per unit is: a. −$.03. b. −$.02. c. −$.01. d. $.02. e. none of the above
e. none of the above Net profit per unit = $.61 − $.58 − $.02 = $.01.
