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2022-23 International finance Gr.AR (35894) > Theroy > Flashcards

Theroy Flashcards

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1
Q

A common type of swap transaction in the foreign exchange market is the ________ where the dealer buys the currency in the spot market and sells the same amount back to the same bank in the forward market.

A

spot against forward

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2
Q

The theory of ________ states that the difference in the national interest rates for securities of similar risk and maturity should be equal to but opposite in sign to the forward rate discount or premium for the foreign currency, except for transaction costs.

A

Interest rate parity

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3
Q

The current U.S. dollar-yen spot rate is 125¥/$. If the 90-day forward exchange rate is 127 ¥/$ then the yen is selling at a per annum ________ of ________.

A

discount; 6.30%

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4
Q

A forward contract to deliver British pounds for U.S. dollars could be described either as ________ or ________.

A

selling pounds forward; buying dollars forward.

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5
Q

A ________ is an exchange rate quoted today for settlement at some time in the future.

A

forward rate

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6
Q

A ________ transaction in the foreign exchange market requires delivery of foreign exchange at some future date.

A

forward

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7
Q

________ states that nominal interest rates in each country are equal to the required real rate of return plus compensation for expected inflation.

A

The Fisher Effect

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8
Q

________ make money on currency exchanges by the difference between the ________ price, or the price they offer to pay, and the ________ price, or the price at which they offer to sell the currency.

A

Dealers; bid; ask

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9
Q

The current U.S. dollar-yen spot rate is 125¥/$. If the 90-day forward exchange rate is 127 ¥/$ then the yen is selling at a per annum ________ of ________.

A

discount; 6.30%

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10
Q

The U.S. dollar suddenly changes in value against the euro moving from an exchange rate of $0.8909/euro to $0.8709/€. Thus, the dollar has ________ by ________.

A

appreciated; 2.30%

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11
Q

A ________ is an exchange rate quoted today for settlement at some time in the future.

A

forward rate

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12
Q

Assume a nominal interest rate on one-year U.S. Treasury Bills of 4.60% and a real rate of interest of 2.50%. Using the Fisher Effect Equation, what is the approximate expected rate of inflation in the U.S. over the next year?

A

2.10%

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13
Q

In the foreign exchange market, ________ seek all of their profit from exchange rate changes while ________ seek to profit from simultaneous exchange rate differences in different markets.

A

speculators; arbitragers

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14
Q

Oregon Transportation Inc. (OTI) has just signed a contract to purchase light rail cars from a manufacturer in Germany for euro 2,500,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, OTI is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
If OTI chooses NOT to hedge their euro payable, the amount they pay in six months will be ________.
(Missing picture)
Select one:
a. unknown today
b. $3,500,000
c. $3,450,000
d. € 3,450,000

A

a. unknown today

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15
Q

The current U.S. dollar-yen spot rate is 125¥/$. If the 90-day forward exchange rate is 127 ¥/$ then the yen is selling at a per annum ________ of ________.

A

discount; 6.30%

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16
Q

List 3 factors in determining the premium price of a currency option.

A
  • Daily spot price movement (its standard deviation)
  • The present spot rate.
  • The time to maturity.
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17
Q

Given the following exchange rates, which of the multiple-choice choices represents a potentially profitable intermarket arbitrage opportunity?
1.1226 €/$
0.00864 €/¥
Select one:
a. 115.74 ¥/€
b. 119.87 ¥/$
c. 129.93 ¥/$
d. 0.8908 $/€

A

b.119.87 ¥/$

18
Q

A U.S. timber products firm has a long-term contract to import unprocessed logs from Canada. To avoid occasional and unpredictable changes in the exchange rate between the U.S. dollar and the Canadian dollar, the firms agree to split between the two firms the impact of any exchange rate movement. This type of agreement is referred to as ________.

A

risk-sharing

19
Q

List 3 things that regard the buyer of a long put option

A
  • maximum gain is the difference between the strike price and the premium paid.
  • has a gain equal to but opposite in sign to the writer of the option.
  • has a maximum loss equal to the premium paid.
20
Q

Oregon Transportation Inc. (OTI) has just signed a contract to purchase light rail cars from a manufacturer in Germany for euro 2,500,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, OTI is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
If OTI chooses to hedge its transaction exposure in the forward market, it will ________ euro 2,500,000 forward at a rate of ________.
(Missing picture)
Select one:
a. sell; $1.38.
b. buy; $1.38.
c. buy; $1.40.
d. sell; € 1.40

A

b. buy; $1.38.

21
Q

In the foreign exchange market, ________ seek all of their profit from exchange rate changes while ________ seek to profit from simultaneous exchange rate differences in different markets.

A

speculators; arbitragers

22
Q

According to the International Fisher Effect, the forecast change in the spot rate between two countries is equal to

A

The opposite sign to the different between nominal interest rates.

23
Q

Jaguar has full manufacturing costs of their S-type sedan of £22,803. They sell the S-type in the UK with a 20% margin for a price of £27,363. Today these cars are available in the US for $55,000 which is the UK price multiplied by the current exchange rate of $2.01/£. Jaguar has committed to keeping the US price at $55,000 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $2.15/£, and Jaguar has not hedged against currency changes, what is the percentage margin the company will realize given the new exchange rate?

A

12%

24
Q

________ make money on currency exchanges by the difference between the ________ price, or the price they offer to pay, and the ________ price, or the price at which they offer to sell the currency.

A

Dealers; bid; ask

25
Q

According to the Big Mac Index, the implied PPP exchange rate is Mexican peso 8.50/$1 but the actual exchange rate is peso10.80/$1. Thus, at current exchange rates the $ appears to be ________ by ________.

A

overvalued; approximately 27%

26
Q

A ________ transaction in the foreign exchange market requires an almost immediate delivery (typically within two days) of foreign exchange.

A

spot

27
Q

A ________ transaction in the foreign exchange market requires delivery of foreign exchange at some future date.

A

forward

28
Q

________ seek to profit from trading in the market itself rather than having the foreign exchange transaction being incidental to the execution of a commercial or investment transaction.

A

Speculators and arbitragers

29
Q

The implied PPP rate of exchange of Mexican Pesos per U.S. dollar is 8.50 according to the Big Mac Index. The current exchange rate is Peso 10.80/$1. Thus, according to PPP and the Law of One Price, at the current exchange rate the peso is ________.

A

undervalued

30
Q

Other things equal, and assuming efficient markets, if a Honda Accord costs $21,375 in the U.S. then at an exchange rate of $1.98/£, the Honda Accord should cost ________ in Great Britain.

A

£10,795

31
Q

If the current exchange rate is 113 Japanese yen per U.S. dollar, the price of a Big Mac hamburger in the United States is $3.41, and the price of a Big Mac hamburger in Japan is 280 yen, then other things equal, the Big Mac hamburger in the United States is ________.

A

over priced

32
Q

Andrea Cujoli is a currency speculator who enjoys “betting” on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Andrea thinks the yen will move to ¥128.00/$ in the next six months. If Andrea buys $100,000 worth of yen at today’s spot price and sells within the next six months at ¥128/$ she will earn a profit of ________. Do not consider Time Value of Money.

A

$1460.94

33
Q

The implied PPP rate of exchange of Mexican Pesos per U.S. dollar is 8.50 according to the Big Mac Index. The current exchange rate is Peso 10.80/$1. Thus, according to PPP and the Law of One Price, at the current exchange rate the peso is ________.

A

undervalued

34
Q

What type of international risk exposure measures the change in present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates?

A

Operating exposure

35
Q

A common type of swap transaction in the foreign exchange market is the ________ where the dealer buys the currency in the spot market and sells the same amount back to the same bank in the forward market.

A

“spot against forward”

36
Q

According to the international Fisher Effect, if an investor purchases a five-year U.S. bond that has an annual interest rate of 5% rather than a comparable British bond that has an annual interest rate of 6%, then the investor must be expecting the ________ to ________ at a rate of at least 1% per year over the next 5 years.

A

U.S. dollar; appreciate

37
Q

________ exposure is far more important for the long-run health of a business than changes caused by ________ or ________ exposure.

A

Operating; translation; transaction

38
Q

A U.S. firm sells merchandise today to a British company for £100,000. The current exchange rate is $2.03/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to $2.05/£ the U.S. firm will realize a ________ of ________.

A

gain; $2000

39
Q

A forward contract to deliver British pounds for U.S. dollars could be described either as ________ or ________.

A

selling pounds forward; buying dollars forward.

40
Q

A speculator that has ________ a futures contract has taken a ________ position.

A

sold; short

41
Q

A foreign currency ________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, place, and price.

A) futures
B) forward
C) option
D) swap
A) futures

A

2022-23 International finance Gr.AR (35894) (2 decks)

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