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Chapter_10_Exchange_Rates_and_Foreign_Ex (1)

# 4 a us firm expects to receive payment of 1 million

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4. A U.S. firm expects to receive payment of €1 million in 90 days for exports to France. At an exchange rate of \$1/€, the firm will make zero profits. If the exchange rate in 90 days turns out to be \$0.90/€, assuming zero transaction costs, the firm will make (A) a loss of \$100,000. (B) a loss of \$50,000. (C) a profit of \$100,000.

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5. The market currently prices one-year euro futures at \$1.20, but you think the dollar will weaken to \$1.32 per euro in the next 12 months. As a speculator, you buy these futures and if you are proved right, assuming zero transaction costs, you will realize a (A) 10% profit. (B) 8% profit. (C) 5% profit.
6. Assume a speculator anticipates that the spot rate of the franc in 3 months will be lower than today’s 3-month forward rate of the franc, \$0.50=1 franc. (a) How can this speculator use \$1 million to speculate in the forward market? (b) What occurs if the franc’s spot rate in 3 months is \$0.40? \$0.60? \$0.50?

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1. A; 2. B; 3. B; 4. A; 5. A 6. (a) The speculator should buy francs on the spot market in 3 months and sell francs on the forward market today for delivery in 3 months at \$0.50=1 franc . (b) If the franc’s spot rate in 3 months is \$0.40, the speculator could make a profit of \$0.10 on each franc. If the franc’s spot rate in 3 months is \$0.60, the speculator would suffer a loss of \$.10 on each franc.
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4 A US firm expects to receive payment of 1 million in 90...

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