1.If a country's government imposes a tariff on imported goods, that country's current account balance will

likely ____ (assuming no retaliation by other governments).

a. decrease

b. increase

c. remain unaffected

d. either A or C are possible

2. Assume that Live Co. has expected cash flows of $200,000 from domestic operations, SF200,000 from

Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc's

value and euro's value are expected to be $.83 and $1.29 respectively, at the end this year. What are

the expected dollar cash flows of Live Co?

a. $200,000

b. $559,500

c. $582,500

d. $393,500

3. Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$2,000,000, while

Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate

of the Australian dollar is $.55. What is the net inflow or outflow as measured in U.S. dollars?

a. $500,000 outflow.

b. $500,000 inflow.

c. $275,000 inflow.

d. $275,000 outflow.

4. Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the

Mexican five-year interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.20.

What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is

used as a forecast?

a. $.131.

b. $.226.

c. $.262.

d. $.140.

e. $.174.

Hint: (1.05)5/(1.08)5 - 1 = -13%

5. Which of the following statements is not true?

a. Exporters may complain that they are being mistreated because the currency of their

country is too weak.

b. Outsourcing affects the balance of trade because it means that a service is purchased in

another country.

c. Sometimes, trade policies are used to punish countries for various actions.

d. Tariffs imposed by the EU have caused some friction between EU countries that

commonly import products and other EU countries.

e. All of the above are true.

6. A weak home currency may not be a perfect solution to correct a balance of trade deficit because:

a. it reduces the prices of imports paid by local companies.

b. it increases the prices of exports by local companies.

c. it prevents international trade transactions from being prearranged.

d. foreign companies may reduce the prices of their products to stay competitive.

7. Assume that a bank's bid rate on Swiss francs is $.43 and its ask rate is $.47. Its bid-ask percentage

spread is:

a. about 8.44%.

b. about 8.51%.

c. about 8.03%.

d. about 8.17%.

8. 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. = 3%

3-month deposit rate in Great Britain = 4%

If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S.

dollars you will have after 90 days?

a. $1,024,000.

b. $1,030,000.

c. $1,040,000.

d. $1,034,000.

e.none of the above

9.The international Fisher effect (IFE) suggests that:

a. a home currency will depreciate if the current home interest rate exceeds the

current foreign interest rate.

b. a home currency will appreciate if the current home interest rate exceeds the

current foreign interest rate.

c. a home currency will appreciate if the current home inflation rate exceeds the

current foreign inflation rate.

d. a home currency will depreciate if the current home inflation rate exceeds the

current foreign inflation rate.

10, The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is

the value of euro today?

a. $1.365

b. $1.235

c. $1.330

d. $1.30

11. Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of

€300,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward

rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell €300,000 forward

in three months. The spot rate of the euro on September 1 is $1.15. Graylon will receive $____ for the

euros.

a. 324,000

b. 330,000

c. 300,000

d. 330,000

12. 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 dollar = $.42

Annual 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

Hint: $500,000/$.41 = NZ$_______ × (1.08)

= NZ$________ × _______ = ___________

Yield =

13. 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%

14. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to

exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are

currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars

should you expect to receive for your baht?

a. A$39.93.

b. A$25,043.48.

c. A$553.00.

d. none of the above

15. Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume

the bid rate of an Australian dollar is $.63 while the ask rate is $.625 at Bank V. Given this

information, what would be your gain if you use $1,000,000 and execute locational arbitrage?

That is, how much will you end up with over and above the $1,000,000 you started with?

a. $32,787

b. $32,063.

c. $33,041

d. $31,444

e. $35,343

16. 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 dollar = $.42

Annual 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

Hint: $500,000/$.41 = NZ$1,219,512 × (1.08)

= NZ$1,317,073 × .42 = $553,171

Yield = ( ________ - $500,000)/$500,000 = ___________

17. Assume that the inflation rate in Singapore is 5%, while the inflation rate in the U.S. is 8%.

According to PPP, the Singapore dollar should ____ by ____%.

a. appreciate; 2.86

b. depreciate; 2.86

c. appreciate; 2.4

d. depreciate; 2.4

18. Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of

$1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of

$.02. If the spot rate at the option's maturity turns out to be $1.56, what is Carl's profit or loss

per unit (assuming the buyer of the option acts rationally)?

a. -$0.01.

b. $0.01.

c. -$0.04.

d. $0.04.

e. -$0.03.

19.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. You expect the spot rate in 60 days to be $.0090. How many dollars

will you receive for the 5,000,000 yen 60 days from now?

a. $44,500.

b. $45,000.

c. $526 million.

d. $47,500.

20. Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a

German security. The current spot rate for the euro is $1.00. Samson can borrow funds in the

U.S. at an annualized interest rate of 6 percent. If Samson uses a money market hedge, how

much should it borrow in the U.S.?

a. $952,381.

b. $995,851.

c. $943,396.

d. $995,025.

21. The premium on a euro call option is $.02. The exercise price is $1.32. The break-even point is ____

for the buyer of the call, and ____ for the seller of the call. (Assume zero transactions costs and that the

buyer and seller of the put option are speculators.)

a. $1.30; $1.30

b. $1.34; $1.30

c. $1.30; $1.34

d. $1.34; $1.34

22. Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in

Greece. Both subsidiaries frequently remit their earnings back to the parent company. The

German subsidiary generated a net outflow of €2,000,000 this year, while the Greek subsidiary

generated a net inflow of €1,500,000. What is the net inflow or outflow as measured in U.S.

dollars this year? The exchange rate for the euro is $1.05.

a. $3,675,000 outflow

b. $525,000 outflow

c. $525,000 inflow

d. $210,000 outflow

23. The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British

pound is quoted at $1.63. The forward ____ is ____ percent.

a. discount; 1.9

b. discount; 1.8

c. premium; 1.9

d. premium; 1.8

24. Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net cash flows into

operations and remits half to the parent. Livingston's expected cash flows from domestic business are

$100,000 and the Korean subsidiary is expected to generate 100 million Korean won at the end of the

year. The expected value of won is $.0012. What are the expected dollar cash flows of Livingston Co.?

a. $100,000

b. $200,000

c. $160,000

d. $60,000

25. The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is the value

of euro today?

a. $1.365

b. $1.235

c. $1.330

d. $1.30

26. 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 it acts rationally?

a. $33,600.

b. $46,900.

c. $44,100.

d. $36,400.

Hint:

Dollars paid when exercising the option = £________ × $.50 = $35,000.

Premium paid for options = £70,000 × $.02 =

Amount of dollars paid = ____________

27. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90

days to make payment on imports from Canada, it could:

a. obtain a 90-day forward purchase contract on Canadian dollars.

b. obtain a 90-day forward sale contract on Canadian dollars.

c. purchase Canadian dollars 90 days from now at the spot rate.

d. sell Canadian dollars 90 days from now at the spot rate.

28. A Japanese yen is worth $.0080, and a Fijian dollar (F$) is worth $.5900. What is the value of the yen in

Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)?

a. 73.75.

b. 125.

c. 1.69.

d. 0.014.

e. none of the above

29. A forward contract can be used to lock in the ____ of a specified currency for a future point in

time.

a. purchase price

b. sale price

c. A or B

d. none of the above

30. The interest rate in the U.K. is 8%, while the interest rate in the U.S. is 5%. The spot rate for the

British pound is $1.50. According to the international Fisher effect (IFE), the British pound

should adjust to a new level of:

a. $1.44

b. $1.46

c. $1.42

d. $1.59

31. 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%

Hint:

(1 + .05)/(1 + .07) ´ $0.689 = $0.676. ($100,000/A$0.689) ´ (1 + .06) = A$153,846 ´ $0.676 =

$104,000.

32. A share of the ADR of a Dutch firm represents one share of that firm's stock that is traded on a Dutch

stock exchange. The share price of the firm was 15 euros when the Dutch market closed. As the U.S.

market opens, the euro is worth $1.10. Thus, the price of the ADR should be ____.

a. $13.64

b. $15.00

c. $16.50

d. 16.50 euros

e. none of the above

33. A share of the ADR of a Dutch firm represents one share of that firm's stock that is traded on a Dutch

stock exchange. The share price of the firm was 15 euros when the Dutch market closed. As the U.S.

market opens, the euro is worth $1.10. Thus, the price of the ADR should be ____.

a. $13.64

b. $15.00

c. $16.50

d. 16.50 euros

e. none of the above

34. Assume the following information:

Quoted Bid Price

Quoted Ask Price

Value of an Australian dollar (A$) in $ $0.67

$0.69

Value of Mexican peso in $ $.074

$.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

35. Jensen Co. expects to pay €50,000 in one month for its imports from France. It also expects to

receive €200,000 for its exports to Belgium in one month. Jensen estimates the standard

deviation of monthly percentage changes of the euro to be 2.5 percent over the last 50 months.

Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR)

method based on a 97.5% confidence level, what is the maximum one month loss in dollars if

the expected percentage change of the euro during next month is 2%? Assume that current

spot rate of the euro (before considering the maximum one-month loss) is $1.35.

a. -$4,303

b. -$7,830

c. -$5,873

d. -$1,958

Hint: Net exposure = €200,000 - €50,000 = €150,000

36. Assume that the total value of investment transactions between U.S. and Mexico is minimal. Also

assume that total dollar value of trade transactions between these two countries is very large. Now

assume that Mexico's inflation has suddenly increased, and Mexican interest rates have suddenly

increased. Overall, this would put ____ pressure on the value of Mexican peso. The inflation effect

should be ____ pronounced than the interest rate effect.

a. downward; more

b. upward; more

c. downward; less

d. upward; less

37. Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in

a(n) ____ in the value of the British pound with respect to ____, other things being equal.

a. increase; U.S. dollar

b. increase; nondollar currencies

c. decrease; nondollar currencies

d. decrease; U.S. dollar

38.Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The

following annual interest rates apply:

Currency Lending Rate Borrowing Rate

Dollars 7.10% 7.50%

New Zealand dollar (NZ$) 6.80% 7.25%

Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank's forecast is

correct, what will its dollar profit be from speculation over the five-day period (assuming it does not use

any of its existing consumer deposits to capitalize on its expectations)?

a. $521,325.

b. $500,520.

c. $104,262.

d. $413,419.

e. $208,044.

Hint:

1. Borrow $5 million.

2. Convert to NZ$: $5,000,000/$.48 = NZ$ __________

3. Invest the NZ$ at an annualized rate of 6.80% over five days.

NZ$________ ´ [1 + 6.80% (5/360)]

4. Convert the NZ$ back to dollars:

5. Repay the dollars borrowed.

6. After repaying the loan, the remaining dollar profit is:

39. A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The

premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of

dollars received (after accounting for the premium paid)?

a. $6,875,000.

b. $7,250,000.

c. $7,000,000.

d. $6,500,000.

e. none of the above

40. 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 option are speculators.)

a. $1.63; $1.63

b. $1.63; $1.60

c. $1.63; $1.57

d. $1.57; $1.63

e. none of the above

41.A strong dollar is normally expected to cause:

a. high unemployment and high inflation in the U.S.

b. high unemployment and low inflation in the U.S.

c. low unemployment and low inflation in the U.S.

d. low unemployment and high inflation in the U.S.

42. Assume that interest rate parity holds. U.S. interest rate is 13% and British interest rate is 10%.

The forward rate on British pounds exhibits a ____ of ____ percent.

a. discount; 2.73

b. premium; 2.73

c. discount; 3.65

d. premium; 3.65

43. Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the

Mexican five-year interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.20.

What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is

used as a forecast?

a. $.131.

b. $.226.

c. $.262.

d. $.140.

e. $.174.

44. A weak dollar is normally expected to cause:

a. high unemployment and high inflation in the U.S.

b. high unemployment and low inflation in the U.S.

c. low unemployment and low inflation in the U.S.

d. low unemployment and high inflation in the U.S.

45. 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. You expect the spot rate in 60 days to be $.0090. How many dollars will you

receive for the 5,000,000 yen 60 days from now if you sell yen forward?

a. $44,500

b. $45,000

c. $526 million

d. $47,500

e. $556 million

46. 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%

47. Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the

Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to

be 1 percent over the last 100 days. Assume that these percentage changes are normally

distributed. Use the value-at-risk (VAR) method based on a 95% confidence level for the

following question(s).

What is the maximum one-day loss if the expected percentage change of the euro tomorrow is

0.5%?

a. -0.5%

b. -2.2%

c. -1.5%

d. -1.2%

48.According to interest rate parity (IRP):

a. the forward rate differs from the spot rate by a sufficient amount to offset the

inflation differential between two currencies.

b. the future spot rate differs from the current spot rate by a sufficient amount to

offset the interest rate differential between two currencies.

c. the future spot rate differs from the current spot rate by a sufficient amount to

offset the inflation differential between two currencies.

d. the forward rate differs from the spot rate by a sufficient amount to offset the

interest rate differential between two currencies.

49. 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. 3.43%

b. 5.68%

c. 6.5%

d. 7.3%

50. On November 3rd the Federal Reserve decided to purchase $600 billion of Treasury Securities by June

2011 or $75 billion per month. Treasury bonds yields fell, stock prices rose.

What affect do you think ending these purchases in June will have on the dollar, inflation expectations,

real interest rates. What affect will this have on other currencies in general?

likely ____ (assuming no retaliation by other governments).

a. decrease

b. increase

c. remain unaffected

d. either A or C are possible

2. Assume that Live Co. has expected cash flows of $200,000 from domestic operations, SF200,000 from

Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc's

value and euro's value are expected to be $.83 and $1.29 respectively, at the end this year. What are

the expected dollar cash flows of Live Co?

a. $200,000

b. $559,500

c. $582,500

d. $393,500

3. Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$2,000,000, while

Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate

of the Australian dollar is $.55. What is the net inflow or outflow as measured in U.S. dollars?

a. $500,000 outflow.

b. $500,000 inflow.

c. $275,000 inflow.

d. $275,000 outflow.

4. Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the

Mexican five-year interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.20.

What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is

used as a forecast?

a. $.131.

b. $.226.

c. $.262.

d. $.140.

e. $.174.

Hint: (1.05)5/(1.08)5 - 1 = -13%

5. Which of the following statements is not true?

a. Exporters may complain that they are being mistreated because the currency of their

country is too weak.

b. Outsourcing affects the balance of trade because it means that a service is purchased in

another country.

c. Sometimes, trade policies are used to punish countries for various actions.

d. Tariffs imposed by the EU have caused some friction between EU countries that

commonly import products and other EU countries.

e. All of the above are true.

6. A weak home currency may not be a perfect solution to correct a balance of trade deficit because:

a. it reduces the prices of imports paid by local companies.

b. it increases the prices of exports by local companies.

c. it prevents international trade transactions from being prearranged.

d. foreign companies may reduce the prices of their products to stay competitive.

7. Assume that a bank's bid rate on Swiss francs is $.43 and its ask rate is $.47. Its bid-ask percentage

spread is:

a. about 8.44%.

b. about 8.51%.

c. about 8.03%.

d. about 8.17%.

8. 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. = 3%

3-month deposit rate in Great Britain = 4%

If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S.

dollars you will have after 90 days?

a. $1,024,000.

b. $1,030,000.

c. $1,040,000.

d. $1,034,000.

e.none of the above

9.The international Fisher effect (IFE) suggests that:

a. a home currency will depreciate if the current home interest rate exceeds the

current foreign interest rate.

b. a home currency will appreciate if the current home interest rate exceeds the

current foreign interest rate.

c. a home currency will appreciate if the current home inflation rate exceeds the

current foreign inflation rate.

d. a home currency will depreciate if the current home inflation rate exceeds the

current foreign inflation rate.

10, The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is

the value of euro today?

a. $1.365

b. $1.235

c. $1.330

d. $1.30

11. Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of

€300,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward

rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell €300,000 forward

in three months. The spot rate of the euro on September 1 is $1.15. Graylon will receive $____ for the

euros.

a. 324,000

b. 330,000

c. 300,000

d. 330,000

12. 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 dollar = $.42

Annual 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

Hint: $500,000/$.41 = NZ$_______ × (1.08)

= NZ$________ × _______ = ___________

Yield =

13. 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%

14. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to

exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are

currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars

should you expect to receive for your baht?

a. A$39.93.

b. A$25,043.48.

c. A$553.00.

d. none of the above

15. Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume

the bid rate of an Australian dollar is $.63 while the ask rate is $.625 at Bank V. Given this

information, what would be your gain if you use $1,000,000 and execute locational arbitrage?

That is, how much will you end up with over and above the $1,000,000 you started with?

a. $32,787

b. $32,063.

c. $33,041

d. $31,444

e. $35,343

16. 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 dollar = $.42

Annual 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

Hint: $500,000/$.41 = NZ$1,219,512 × (1.08)

= NZ$1,317,073 × .42 = $553,171

Yield = ( ________ - $500,000)/$500,000 = ___________

17. Assume that the inflation rate in Singapore is 5%, while the inflation rate in the U.S. is 8%.

According to PPP, the Singapore dollar should ____ by ____%.

a. appreciate; 2.86

b. depreciate; 2.86

c. appreciate; 2.4

d. depreciate; 2.4

18. Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of

$1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of

$.02. If the spot rate at the option's maturity turns out to be $1.56, what is Carl's profit or loss

per unit (assuming the buyer of the option acts rationally)?

a. -$0.01.

b. $0.01.

c. -$0.04.

d. $0.04.

e. -$0.03.

19.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. You expect the spot rate in 60 days to be $.0090. How many dollars

will you receive for the 5,000,000 yen 60 days from now?

a. $44,500.

b. $45,000.

c. $526 million.

d. $47,500.

20. Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a

German security. The current spot rate for the euro is $1.00. Samson can borrow funds in the

U.S. at an annualized interest rate of 6 percent. If Samson uses a money market hedge, how

much should it borrow in the U.S.?

a. $952,381.

b. $995,851.

c. $943,396.

d. $995,025.

21. The premium on a euro call option is $.02. The exercise price is $1.32. The break-even point is ____

for the buyer of the call, and ____ for the seller of the call. (Assume zero transactions costs and that the

buyer and seller of the put option are speculators.)

a. $1.30; $1.30

b. $1.34; $1.30

c. $1.30; $1.34

d. $1.34; $1.34

22. Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in

Greece. Both subsidiaries frequently remit their earnings back to the parent company. The

German subsidiary generated a net outflow of €2,000,000 this year, while the Greek subsidiary

generated a net inflow of €1,500,000. What is the net inflow or outflow as measured in U.S.

dollars this year? The exchange rate for the euro is $1.05.

a. $3,675,000 outflow

b. $525,000 outflow

c. $525,000 inflow

d. $210,000 outflow

23. The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British

pound is quoted at $1.63. The forward ____ is ____ percent.

a. discount; 1.9

b. discount; 1.8

c. premium; 1.9

d. premium; 1.8

24. Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net cash flows into

operations and remits half to the parent. Livingston's expected cash flows from domestic business are

$100,000 and the Korean subsidiary is expected to generate 100 million Korean won at the end of the

year. The expected value of won is $.0012. What are the expected dollar cash flows of Livingston Co.?

a. $100,000

b. $200,000

c. $160,000

d. $60,000

25. The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is the value

of euro today?

a. $1.365

b. $1.235

c. $1.330

d. $1.30

26. 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 it acts rationally?

a. $33,600.

b. $46,900.

c. $44,100.

d. $36,400.

Hint:

Dollars paid when exercising the option = £________ × $.50 = $35,000.

Premium paid for options = £70,000 × $.02 =

Amount of dollars paid = ____________

27. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90

days to make payment on imports from Canada, it could:

a. obtain a 90-day forward purchase contract on Canadian dollars.

b. obtain a 90-day forward sale contract on Canadian dollars.

c. purchase Canadian dollars 90 days from now at the spot rate.

d. sell Canadian dollars 90 days from now at the spot rate.

28. A Japanese yen is worth $.0080, and a Fijian dollar (F$) is worth $.5900. What is the value of the yen in

Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)?

a. 73.75.

b. 125.

c. 1.69.

d. 0.014.

e. none of the above

29. A forward contract can be used to lock in the ____ of a specified currency for a future point in

time.

a. purchase price

b. sale price

c. A or B

d. none of the above

30. The interest rate in the U.K. is 8%, while the interest rate in the U.S. is 5%. The spot rate for the

British pound is $1.50. According to the international Fisher effect (IFE), the British pound

should adjust to a new level of:

a. $1.44

b. $1.46

c. $1.42

d. $1.59

31. 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%

Hint:

(1 + .05)/(1 + .07) ´ $0.689 = $0.676. ($100,000/A$0.689) ´ (1 + .06) = A$153,846 ´ $0.676 =

$104,000.

32. A share of the ADR of a Dutch firm represents one share of that firm's stock that is traded on a Dutch

stock exchange. The share price of the firm was 15 euros when the Dutch market closed. As the U.S.

market opens, the euro is worth $1.10. Thus, the price of the ADR should be ____.

a. $13.64

b. $15.00

c. $16.50

d. 16.50 euros

e. none of the above

33. A share of the ADR of a Dutch firm represents one share of that firm's stock that is traded on a Dutch

stock exchange. The share price of the firm was 15 euros when the Dutch market closed. As the U.S.

market opens, the euro is worth $1.10. Thus, the price of the ADR should be ____.

a. $13.64

b. $15.00

c. $16.50

d. 16.50 euros

e. none of the above

34. Assume the following information:

Quoted Bid Price

Quoted Ask Price

Value of an Australian dollar (A$) in $ $0.67

$0.69

Value of Mexican peso in $ $.074

$.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

35. Jensen Co. expects to pay €50,000 in one month for its imports from France. It also expects to

receive €200,000 for its exports to Belgium in one month. Jensen estimates the standard

deviation of monthly percentage changes of the euro to be 2.5 percent over the last 50 months.

Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR)

method based on a 97.5% confidence level, what is the maximum one month loss in dollars if

the expected percentage change of the euro during next month is 2%? Assume that current

spot rate of the euro (before considering the maximum one-month loss) is $1.35.

a. -$4,303

b. -$7,830

c. -$5,873

d. -$1,958

Hint: Net exposure = €200,000 - €50,000 = €150,000

36. Assume that the total value of investment transactions between U.S. and Mexico is minimal. Also

assume that total dollar value of trade transactions between these two countries is very large. Now

assume that Mexico's inflation has suddenly increased, and Mexican interest rates have suddenly

increased. Overall, this would put ____ pressure on the value of Mexican peso. The inflation effect

should be ____ pronounced than the interest rate effect.

a. downward; more

b. upward; more

c. downward; less

d. upward; less

37. Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in

a(n) ____ in the value of the British pound with respect to ____, other things being equal.

a. increase; U.S. dollar

b. increase; nondollar currencies

c. decrease; nondollar currencies

d. decrease; U.S. dollar

38.Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The

following annual interest rates apply:

Currency Lending Rate Borrowing Rate

Dollars 7.10% 7.50%

New Zealand dollar (NZ$) 6.80% 7.25%

Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank's forecast is

correct, what will its dollar profit be from speculation over the five-day period (assuming it does not use

any of its existing consumer deposits to capitalize on its expectations)?

a. $521,325.

b. $500,520.

c. $104,262.

d. $413,419.

e. $208,044.

Hint:

1. Borrow $5 million.

2. Convert to NZ$: $5,000,000/$.48 = NZ$ __________

3. Invest the NZ$ at an annualized rate of 6.80% over five days.

NZ$________ ´ [1 + 6.80% (5/360)]

4. Convert the NZ$ back to dollars:

5. Repay the dollars borrowed.

6. After repaying the loan, the remaining dollar profit is:

39. A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The

premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of

dollars received (after accounting for the premium paid)?

a. $6,875,000.

b. $7,250,000.

c. $7,000,000.

d. $6,500,000.

e. none of the above

40. 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 option are speculators.)

a. $1.63; $1.63

b. $1.63; $1.60

c. $1.63; $1.57

d. $1.57; $1.63

e. none of the above

41.A strong dollar is normally expected to cause:

a. high unemployment and high inflation in the U.S.

b. high unemployment and low inflation in the U.S.

c. low unemployment and low inflation in the U.S.

d. low unemployment and high inflation in the U.S.

42. Assume that interest rate parity holds. U.S. interest rate is 13% and British interest rate is 10%.

The forward rate on British pounds exhibits a ____ of ____ percent.

a. discount; 2.73

b. premium; 2.73

c. discount; 3.65

d. premium; 3.65

43. Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the

Mexican five-year interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.20.

What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is

used as a forecast?

a. $.131.

b. $.226.

c. $.262.

d. $.140.

e. $.174.

44. A weak dollar is normally expected to cause:

a. high unemployment and high inflation in the U.S.

b. high unemployment and low inflation in the U.S.

c. low unemployment and low inflation in the U.S.

d. low unemployment and high inflation in the U.S.

45. 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. You expect the spot rate in 60 days to be $.0090. How many dollars will you

receive for the 5,000,000 yen 60 days from now if you sell yen forward?

a. $44,500

b. $45,000

c. $526 million

d. $47,500

e. $556 million

46. 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%

47. Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the

Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to

be 1 percent over the last 100 days. Assume that these percentage changes are normally

distributed. Use the value-at-risk (VAR) method based on a 95% confidence level for the

following question(s).

What is the maximum one-day loss if the expected percentage change of the euro tomorrow is

0.5%?

a. -0.5%

b. -2.2%

c. -1.5%

d. -1.2%

48.According to interest rate parity (IRP):

a. the forward rate differs from the spot rate by a sufficient amount to offset the

inflation differential between two currencies.

b. the future spot rate differs from the current spot rate by a sufficient amount to

offset the interest rate differential between two currencies.

c. the future spot rate differs from the current spot rate by a sufficient amount to

offset the inflation differential between two currencies.

d. the forward rate differs from the spot rate by a sufficient amount to offset the

interest rate differential between two currencies.

49. 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. 3.43%

b. 5.68%

c. 6.5%

d. 7.3%

50. On November 3rd the Federal Reserve decided to purchase $600 billion of Treasury Securities by June

2011 or $75 billion per month. Treasury bonds yields fell, stock prices rose.

What affect do you think ending these purchases in June will have on the dollar, inflation expectations,

real interest rates. What affect will this have on other currencies in general?

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