FIN 417 Exam #1 Solutions

FIN 417 Exam #1 Solutions - 3 1. Put an X in the square...

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Unformatted text preview: 3 1. Put an X in the square that best describes the nature of the specific countrys currency. (10 points) (Lecture 1, Front cover of text book) 2. Country A can produce 10 yards of textiles and 6 pounds of food per unit of input. Country B can produce 8 yards of textiles and 5 pounds of food per unit of input. (1 point) (Test Bank) a) Country A is relatively more efficient than Country B in the production of textiles b) Country B is relatively more efficient than Country A in the production of food c) Country A has an absolute advantage over Country B in the production of food and textiles d) None of the above e) All of the above 3. In the 1850s the French franc was valued by both gold and silver, under the official French ratio which equated a gold franc to a silver franc 15 times as heavy. At the same time, the gold from newly discovered mines in California poured into the market, depressing the value of gold. As a result, (1 point) (Test Bank) a) The franc effectively became a silver currency. b) The franc effectively became a gold currency. c) Silver became overvalued under the French official ratio d) Answers a) and c) are correct Country Uses USD Uses Euro Peg to USD Peg to Euro Limited Flexibility Managed Floating Independent Floating Burkina Faso X Canada X Ecuador X Finland X Morocco X Panama X P.R. China X San Marino X Sweden X Venezuela X 4. The current spot exchange rate is $1.55/ and the three-month forward rate is $1.50/. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.52/ in three months. Assume that you would like to buy or sell 1,000,000. What actions do you need to take to speculate in the forward market? (1 point) (Test Bank) a) Sell 1,000,000 forward for $1.50/. b) Buy 1,000,000 forward for $1.50/. c) Wait three months, if your forecast is correct buy 1,000,000 at $1.52/ d) Sell 1,000,000 today at $1.55/; wait three months, if your forecast is correct buy 1,000,000 back at $1.52/ if you agree to buy 1,000,000 forward for $1.50/ and the price is actually turns out to be $1.52/ in three months, your expected profit will be $20,000 = 1,000,000 ($1.52 $1.50) Answer d), while tempting from an accounting standpoint, is wrong since the question asks you to make money with forwards, not by holding a spot position. 5. A bank is quoting the following exchange rates against the dollar for the Swiss franc and the Australian dollar: SFr/$ = 1.5960--70 A$/$ = 1.7225--35 An Australian firm asks the bank for an A$/SFr quote. What cross-rate would the bank quote? (2 points) (Test bank) Keep in mind that SFr/A$ = SFr/$/A$/$, and that the price (bid or ask) for each transaction is the one that is more advantageous to the bank. The SFr/A$ bid price is the number of SFr the bank is willing to pay to buy one A$. This transaction (buy A$sell SFr) is equivalent to selling SFr to buy dollars (at the bid rate of 1.5960 and the selling those dollars to buy A$ (at an ask rate of 1.7235).those dollars to buy A$ (at an ask rate of 1....
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This note was uploaded on 11/15/2011 for the course FIN 417 taught by Professor Griffith during the Fall '11 term at Miami University.

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FIN 417 Exam #1 Solutions - 3 1. Put an X in the square...

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