Part A: Call and put options premiums are affected by the level of existing spot price relative to the strike price. A ____ spot price relative to the strike price results in relatively ____ premium for a call option but a relatively ____ premium for a pu
High; High; Low
A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.02 per unit and the exercise price of the option is $.94. If the spot rate at the time of maturity is $.99, what is the net amount r
$97,000.
A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if
$36,400
If you have bought the right to sell, you are a:
Put buyer.
Your company expects to pay 5,000,000 Japanese yen 90 days from now. You decide to hedge your position by buying Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 90 days to be
$47,500
A speculator sells a put option on Canadian dollars for a premium of $.03 per unit. with an exercise price of $.98. The size of the option contact is C$50,000 and will not be exercised until expiration if at all. If the spot rate for Canadian dollar is $.
-$2500
The purchase of a currency put option would be appropriate for a U.S company under which of the following?
Company expects to collect a foreign currency accounts receivable in six months
Any type of contractual arrangement calling for the delivery (and settlement) of a good or service at a future date at a price agreed upon at the initiation is a /an ________ contract.
Forward
If a contract contains a promise that a specified amount of foreign currency will be delivered on a specified date in the future, the contract is a __________
Forward contract
If a contract contains a promise that standardized units of foreign currency will be delivered on a specified date in the future, the contract is a
Futures contract
If the interest rate on a deposit in the U.K. pound is 6% per year, and the pound is expected to depreciate against the U.S. dollar by 2% , what does the interest rate parity theory imply about the interest rate on a deposit in U.S. dollar?
4%
Assume that the bid rate for Australian dollar $.60 while the ask rate is $.61 at Bank A. Also assume that the bid rate for the Australian dollar is $.62 while the ask rate is $.625 at Bank B. What would be your profit if have $100,000 and you execute loc
$1639.30
Which of the following best describes currency options sold through an options exchange. They grant the buyer a right
But not the obligation, to buy or sell and are standardized.
Forward contracts contain:
A commitment to the owner, and can be tailored to the desire of the owner.
If your firm expects the euro to substantially depreciate, it could speculate by _______ euro call options or _______euros forward in the forward exchange market.
Selling; selling
When you purchase ________, there is no obligation on your part; however, when you purchase ________, there is an obligation on your part.
Put options; forward contracts
The greater the variability of a currency, the ________ will be the premium of a call option on this currency, and the ________ will be the premium of a put option on this currency, other things equal.
Greater; greater
The shorter the time to the expiration date for a currency, the ________ will be the
premium of a call option, and the ________ will be the premium of a put option, other things equal.
lower, lower
Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises
-$1,562
Which of the following is true?
The futures market is primarily used by speculators while the forward market is primarily used for hedging.
If you expect the euro to depreciate, it would be appropriate to ________ for speculative purposes.
Sell a euro call and buy a euro put
If you expect the British pound to appreciate, you could speculate by ________ pound call options or ________ pound put options.
Purchasing; selling
Which of the following is correct about a currency option, other things equal?
a. The lower the exercises price relative to the spot rate, the greater the value of a call option.
Assume no transactions costs exist for any futures or forward contracts. The price of British pound futures with a settlement date 180 days from now will:
Be about the same as the 180-day forward rate.
A firm sells a currency futures contract and then decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by:
Buying an identical futures contract.
If the spot rate of the euro increased substantially over a one-month period, the
futures price on euros would likely ____________over that same period.
Increase substantially
A U.S. firm is bidding for a project needed by the Swiss government. The firm will not know if the bid is accepted until three months from now. The firm will need Swiss francs to cover expenses but will be paid by the Swiss government in dollars if it is
Buying franc call options.
The premium on a pound put option is $.03 per unit. The exercise price is $1.60. The break-even point is ________ for the buyer of the put, and ________ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put op
$1.57; $1.57
You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is:
-$.02
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:
None of the above.
You are a speculator who sells a call option on Swiss francs for a premium of $.06, with an exercise price of $.64. The option will not be exercised until the expiration date, if at all. The spot rate of the Swiss franc is $.69 on the expiration date, you
$.01
You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the e
None of the above.
Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If it expects the yen to depreciate, it could ________ to hedge the exchange rate risk on those exports.
Sell futures contracts on yen
A call option on Australian dollars has a strike (exercise) price of $.56. The present exchange rate is $.59. This call option can be referred to as:
In the money.
A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put option can be referred to as:
Out of the money
A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received b
$84,000
A U.S. corporation has purchased currency call options to hedge a 62,500 British pounds payable. The premium is $.02 per unit and the exercise price of the option is $1.50. If the spot rate of the pound at maturity is $1.65, what is the total amount paid
$95,000
Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. If the spot rate turns out to be $.00
$47,500
Due to ________, market forces should realign the relationship between the interest rate differential between two countries and the forward premium or discount on the exchange rate between their two currencies.
Covered interest arbitrage
Due to ________, market forces should realign the spot rate of a currency among banks.
Locational arbitrage
Due to ________, market forces should realign the difference between the cross exchange rate for a currency from, say points A and B, and the quoted rate for the same currency at point C.
Triangular arbitrage
If interest rate parity holds, then ________ is not feasible.
Covered interest arbitrage
In which case will locational arbitrage be most likely feasible? Bank A's:
Bid price for a currency is greater than Bank B's ask price for the currency
Assume that the interest rate in for Currency X is much higher than the U.S. interest rate. According to Interest Rate Parity Theory, the forward rate of Currency X should:
Exhibit a discount.
If interest rate is higher in the U.S. than in the U.K. and the forward rate of the British pound is the same as its spot rate, then:
Arbitrage flow of funds takes place from U.K. to U.S.
Assume that U.S. investors are benefiting from covered interest arbitrage due to high interest rate on euro. Which of the following adjustments should result from covered interest arbitrage?
Downward pressure on the euro's forward rate.
Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If a U.S. firm uses covered interest arbitrage, which of the
Spot rate of peso increases; forward rate of peso decreases
Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information what would be your gain if you use $1,000,000 an
$15,385
Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds domestic interest rate, the:
Larger will be the forward discount of the foreign currency.
Assume the following information. You have $1,000,000 to invest.
Current spot rate of pound = $1.30
90-day forward rate of pound = $1.28
3-month deposit rate in U.S. = 2.25%
3-month deposit rate in U.K. = 4%
If you use covered interest arbitrage for a 90-
$1,024,000
Assume the following information:
Current spot rate of New Zealand dollar = $.41
Forecasted spot rate of New Zealand dollar 1 year from now = $.43
One year forward rate of the New Zealand dollars = $.42
Annual interest rate on New Zealand dollars = 8%
Ann
10.63%
If annualized nominal interest rates in the US and Switzerland are 12% and 8% respectively and the 90-day forward rate for the Swiss franc is $1.0218, at what current spot rate will interest rate parity hold?
$1.0022
Assume the following information:
Spot rate today of Swiss franc = $.60
1-year forward rate as of today for Swiss franc = $.63
Expected spot rate 1 year from now = $.64
Rate on 1-year deposits denominated in Swiss francs = 7%
Rate on 1-year deposits denom
12.35%
Assume the British interest rates are higher than U.S. rates, and that the spot rate for the pound equals the forward rate, then covered interest arbitrage puts ______ pressure on the pound's spot rate, and ______ pressure on the pound's forward rate.
Upward; downward
Assume the following information. You have $1,000,000 to invest.
Current sport rate of pound = $1.60
90-day forward rate of pound = $1.57
3-month deposit rate in U.S.= 3%
3-month deposit rate in U.K.= 4%
If you use covered interest arbitrage for a 90-day
$1,020,500
Assume the following information:
Current spot rate of Australian dollar=$.64
Forecasted spot rate of Australian dollar 1 year from now = $.59
1-year forward rate of Australian dollar=$.62
Annual interest rate for Australian dollar deposit =9%
Annual inte
5.59%
Given that annual deposit rates for Dollars and Euros are 6% and 4% respectively for the next 5 years. If the current spot rate of the Euro is $1.4015, obtain the implied rate for the Euro five years from now if International Fisher Equation holds exactly
$1.5415
According to interest rate parity (IRP), the:
Forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two countries.
Assume that interest rate parity (IRP) holds. The Mexican interest rate is 5%, and the U.S. interest rate is 8%. Subsequently, the U.S. interest rate decreases to 7%. If IRP is to continue to hold, then the peso's forward ________ will ________.
Forward rate differs from the spot rate by a sufficient amount to offset the interest
rate differential between two countries.
The Purchasing Power Parity (PPP) suggests that a home currency will:
Depreciate if home inflation rate exceeds foreign inflation rate.
The International Fisher Equation (IFE) suggests that a home currency will:
Depreciate if home interest rate exceeds foreign interest rate.
Because there are a variety of factors in addition to inflation that affect exchange rates, this will tend to:
Reduce the probability that PPP shall hold.
According to the IFE, if British interest rates exceed U.S. interest rates,
The British pound will depreciate against the dollar.
The International Fisher Equation (IFE) states that:
Nominal interest rate differential between two countries is approximately equal to the rate of change in exchange rate between their currencies.
If interest rates on the euro are consistently below U.S. interest rates, then for the International Fisher Equation (IFE) to hold,
The value of the euro will appreciate against the dollar.
Under Purchasing Power Parity, the future spot exchange rate is a function of
the initial spot rate in equilibrium and:
The inflation differential
According to the Fisher Equation, if U.S. investors expect a 5% rate of domestic inflation over one year and require a 3% real return on investments over one year,
the exact nominal interest rate on one-year U.S. treasury security would be:
8.15 %
Assume that the Fisher Equation holds approximately for domestic and foreign
countries. If investors in all countries require the same real return, then the difference in nominal interest rates between any two countries is:
Equal to their inflation differential.
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 Equation, the Swiss franc will _____ by about ______.
Appreciate; 2%
According to the International Fisher Equation and the Generalized Fisher Equation, if Venezuela has a much higher nominal interest rate than other countries, its inflation rate will be ______ than other countries, and its currency will _______.
Higher; weaken
According to the "law of one price,
The price of an identical product should be equal across markets when measured in a common currency.
The ________ is also referred to as the "law of one price.
Absolute Purchasing Power Parity
Latin American countries have historically experienced relatively high inflation rates and their currencies have weakened accordingly. This experience is consistent with the concept of:
Purchasing power parity
Assume that during a given period the nominal interest rate in Cyprus was 7% while the nominal interest rate in the US was 5%. The spot rate for the Cyprus
pound ($/CYP) started at $1.50. At the end of the period, according to the IFE,
the Cyprus pound sh
$1.47
Translation exposure reflects the exposure of a firm's:
Financial statements to exchange rate fluctuations.
Transaction exposure reflects the exposure of a firm's:
Ongoing international transactions to exchange rate fluctuations.
Economic exposure refers to the exposure of a firm's:
Future cash flows to exchange rate fluctuations.
Which of the following operations benefits from a continuing appreciation of a firm's local currency?
Borrowing immediately in a foreign currency and converting the funds to the local currency investment.
Economic exposure can affect:
Both MNC and Purely domestic firms.
Generally, MNC with less foreign costs than foreign revenue will be _____ affected by a _____ foreign currency
Favorably; stronger or Adversely; weaker
A firm produces goods for which substitute goods are produced in other countries. An appreciation of the firm's local currency should:
None of the above
A firm produces goods for which substitute goods are produced in other countries. A depreciation of the firm's local currency should:
None of the above
Which of the following is not a form of exposure to exchange rate fluctuations?
Credit exposure / Transnational exposure
________ is not a determinant of translation exposure.
The local (domestic) earnings of the MNC
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
$240,000
Assume the following information:
U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
New Zealand deposit rate for 1 year = 8%
New Zealand borrowing rate for 1 year = 10%
New Zealand dollar forward rate for 1 year = $.40
New Zealand do
$236,127
If a U.S. firm desired to lock in the maximum amount it would have to pay for its net payables in euros but still wanted to be able to capitalize if the euro depreciates substantially against the dollar by the time payment is to be made, the most appropri
Purchasing euro call options
If a U.S. firm desired to lock in a minimum rate at which it could sell its net
receivables in Japanese yen but wanted to be able to capitalize if the yen appreciates substantially against the dollar by the time payment arrives, the most appropriate hedge
Purchasing yen put options.
Use the following information to calculate the dollar cost of using a money market
hedge to hedge 200,000 pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the spot rate of the pound is $2.02, the 180-day forward rate is $2.00
None of the above
A firm has 1,000,000 euro receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy for the firm is to:
Sell euros forward.
A MNC will receive SF1,000,000 in 30 days. Use the following information to
determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option:
$590,000
Assume that Parker Company will receive SF200,000 in 360 days. Assume the following interest rates:
$96,914
The forward rate of the Swiss franc is $.50. The spot rate of the Swiss franc is $.48. The following interest rates exist:
$98,769
Your company will receive C$600,000 in 90 days. The 90-day forward rate for
Canadian dollar is $.80. If you use a forward hedge, you will receive:
$480,000 in 90 days
83. A call option exists on British pounds with an exercise price of $1.60, 90-day expiration date, and a premium of $.03 per unit. A put option also exists on British pounds with an exercise price of $1.60, 90-day expiration date, and a premium of $.02 p
$1,106,000
Assume that Smith Corporation needs to purchase 200,000 British pounds in 90
days. A call option exists on British pounds with an exercise price of $1.68, 90-day expiration date, and a premium of $.04. A put option also exists on British pounds, with an e
$344,000
Which of the following is an example of economic exposure?
An increase in the dollar's value hurts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers.
Any restructuring of operations that ________ the difference between a foreign currency's inflows and outflows may ________ economic exposure.
Reduces; reduce
If an exporter sells his/her accounts receivables off to another firm that becomes responsible for obtaining payments from the various importers. This reflects:
Factoring.
If a bank acknowledges that it will make payments on behalf of a beer importer after the beer is delivered to the importer. This reflects the use of:
Letter of credit.
An importer issues a promissory note to pay for the imported capital goods over a period of five years. The notes are extended to an exporter who sells them at a discount to a bank. This reflects:
Letter of credit
An exporter is willing to send goods to the importer, on account, without a guaranteed payment by the bank. The bank provides a loan to the exporter that is backed by the value of the exported good. This reflects:
Accounts receivable financing.
A firm that sells products through __________ can reduce (used to be able to reduce) corporate taxes on income generated from foreign sales.
Foreign Sales Corporation (FSC)
A ________ provides a summary of freight charges and conveys title to the
merchandise.
Bill of lading
Which of the following payment terms provides the supplier with the greatest degree of protection?
Prepayment.
With _____, the exporter ships the goods to the importer while still retaining actual title to the merchandise.
A consignment arrangement
With _____, the exporter ships the goods to the importer while still retaining actual title to the merchandise.
Factoring
A bill of exchange requesting the bank to pay the face amount upon presentation of
a document is a:
Sight draft.
A bill of exchange requesting a bank to pay the face amount at a future date is a:
Time draft.
An exchange of goods between two parties under two distinct contracts expressed in monetary terms are:
Counter purchase.
Who bears the payment risk in a letter of credit?
issuing bank or confirming bank
A banker's acceptance is a draft drawn on and accepted by ________.
A bank
Derivatives are used in the following ways except:
None of the above
Which of the following is not true concerning regulation of derivatives in the U.S.?
None of the above
Which of the following is not a feature of the forward market?
Contracts usually reversed prior to maturity
Unlike the ________; ___________ are traded on organized exchanges and are
marked to the market.
Swaps; Forwards
Similar to the ________; __________ are agreements embodying obligation to buy
or sell an asset or commodity for future delivery and settlement.
Forwards; Futures
The ____hedge is not a technique used to eliminate transaction exposure by
multinational firms.
Index
Assume that IRP holds. The U.S. five-year interest rate is 5% per year while the
Mexican five-year rate is 8% per year. If today's spot rate of the peso is $.20, what is the approximate five-year forecast of the peso's spot rate using the five year forwar
$.174
If interest rate parity holds and the forward rate is expected to be an unbiased estimate (predictor) of the future spot rate, then:
International Fisher Equation holds