BEC X - FOREX & Derivatives Flashcards
A U.S. company has invested in the U.K. The exchange rate at the time of investment is £2.5 to $1, but after the investment it increases to £2.7 to $1. Did the US$ strengthen or weaken against the Pound.
weaken..
At the time of the investment, the spot rate for the pound relative to the dollar is 0.4 dollar ($1 ÷ £2.5). After the investment, the spot rate for the pound is 0.3704 dollar ($1 ÷ £2.7). The percentage change in the exchange rate is a 7.4% decrease [(0.4 – 0.3704) ÷ 0.4].
A distinguishing feature of a futures contract is that
A. The price is marked to market each day.
B. The parties know each other.
C. Performance is delayed.
D. It is a hedge, not a speculation.
A. The price is marked to market each day.
A characteristic of futures contracts is that their prices are marked to market every day at the close of the day. Thus, the market price is posted at the close of business each day. A mark-to-market provision minimizes a futures contract’s chance of default because profits and losses on the contracts must be received or paid each day through a clearinghouse.
An American importer expects to pay a British supplier 500,000 British pounds in 3 months. Which of the following hedges is best for the importer to fix the price in dollars?
A. Selling British pound call options.
B. Selling British pound put options.
C. Buying British pound put options.
D. Buying British pound call options.
D. Buying British pound call options.
The importer wants to hedge the risk that the fixed amount of foreign currency it must pay in 3 months will gain purchasing power during that time. Buying a call option gives the importer the right to buy (call for) the foreign currency in 3 months at a fixed price, regardless of exchange rate fluctuations in the meantime.
A company headquartered in Vancouver, British Columbia, is building a pipeline for a company in Russia. The invoice amount is due in 90 days and is denominated at 28 million rubles. The Canadian dollar is trading for 28 rubles currently and 29 rubles 90 days forward. Which of the following strategies will the Canadian firm most likely pursue in the 90-day forward market to hedge the transaction exposure inherent in this situation?
A. Purchase 29,000,000 rubles.
B. Sell 28,000,000 rubles.
C. Sell 29,000,000 rubles.
D. Purchase 28,000,000 rubles.
B. Sell 28,000,000 rubles.
The Canadian company knows that it will be receiving 28,000,000 rubles in 90 days. The firm wants to ensure that it will be able to sell these rubles at that time for a certain number of Canadian dollars. The Canadian firm therefore hedges by selling 28,000,000 rubles in the 90-day forward market. The company is buying a guarantee that it will be able to sell a definite number of rubles in 90 days and receive a definite number of Canadian dollars in return, regardless of fluctuations in the exchange rate in the meantime.
Which one of the tools listed below for addressing transaction exposure to currency exchange rate risk is available only to large entities with established banking relationships?
A. Futures contracts.
B. Money market hedges.
C. Forward contracts.
D. Currency options.
C. Forward contracts.
Large corporations that have close relationships with major banks are able to enter into contracts for individual hedging transactions concerning large amounts. These contracts are unavailable to smaller firms or firms without a history with a particular bank.
The spot rate for one Australian dollar is $0.92685 and the 60-day forward rate is $0.93005. Which one of the following statements is consistent with these facts?
A. The U.S. dollar has lost purchasing power with respect to the Australian dollar.
B. The U.S. dollar is trading at a forward premium with respect to the Australian dollar.
C. The U.S. dollar is trading at a forward discount with respect to the Australian dollar.
C. The U.S. dollar is trading at a forward discount with respect to the Australian dollar.
The exchange rate for the Australian dollar is higher in the forward market than the spot market. The Australian dollar is therefore trading at a forward premium. Accordingly, the U.S. dollar is trading at a forward discount.
If consumers in Japan decide they would like to increase their purchases of consumer products made in the United States, in foreign currency markets there will be a tendency for
A. The supply of dollars to decrease.
B. The supply of dollars to increase.
C. The Japanese yen to appreciate relative to the U.S. dollar.
D. The demand for dollars to increase.
D. The demand for dollars to increase.
The increase in demand for U.S. products will increase the demand for the dollars necessary to pay for those products.
All of the following are trade-related factors affecting currency exchange rates except
A. Relative interest rates.
B. Trade barriers.
C. Relative inflation rates.
D. Relative incomes.
A. Relative interest rates.
Relative interest rates is a financial, not a trade-related, factor affecting currency exchange rates.
An exporter enters into a contract to supply goods to a foreign buyer. The contract requires the payment in foreign currency 120 days after delivery. Recently the foreign currency has experienced many fluctuations. The exporter may incur a loss on this contract at the time payment is received due to such fluctuations. Which of the following actions should the exporter take to avoid such loss?
A. Enter into a forward contract with a bank.
B. Invest the foreign currency in the buyer’s country to avoid short-term fluctuations.
C. Wait for the settlement date to see if the foreign currency actually fluctuates.
D. Cancel the export contract.
A. Enter into a forward contract with a bank.
Fluctuations in currency between the contract date and the settlement date may cause a loss on a contract. Hedging is a common way to avoid or reduce such losses. When an exporter is required to pay a foreign currency amount at some time in the future, there is a risk that the foreign currency will appreciate. To hedge against risk, the exporter should purchase a foreign currency forward to fix a definite price.
Country A and country B have been trading partners for years. Recently, country B’s currency greatly depreciated against country A’s currency. Which of the following factors that occur in country A’s economy could contribute to currency B’s depreciation?
- Relative Interest Rate
- Relative Income Level
- Relative Inflation Rate
- Relative Interest Rate - increase
- Relative Income Level - decrease
- Relative Inflation Rate - decrease
When the rate of inflation in country A rises relative to the rates of foreign countries, which of the following will occur?
Demand for Currency A
Foreign Currency Value in Relation to Currency A
Demand for Currency A - decreases
Foreign Currency Value in Relation to Currency A - Increases
When the rate of inflation in a given country rises relative to the rates of other countries, the products of that country become relatively expensive and the demand for that country’s currency falls. The demand curve shifts to the left. As investors sell currency A, more of it is available. The supply curve shifts to the right. The leftward shift of the demand curve and the rightward shift of the supply curve result in a new equilibrium point at a lower price in terms of currency A. Thus, as a result of the higher inflation in country A, foreign currency has appreciated in relation to currency A.
Which one of the following statements supports the conclusion that the U.S. dollar has gained purchasing power against the Japanese yen?
A. Inflation has recently been higher in the U.S. than in Japan.
B. The yen’s spot rate with respect to the dollar has just fallen.
C. The dollar is currently trading at a premium in the forward market with respect to the yen.
D. Studies recently published in the financial press have shed doubt on the interest rate parity (IRP) theory.
B. The yen’s spot rate with respect to the dollar has just fallen.
If the yen’s spot rate has just fallen, more yen are required to buy a single dollar. The yen has therefore depreciated, i.e., lost purchasing power. At the same time, the dollar has gained purchasing power.
