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FINC 6367 Midterm Exam with Answers (200/200 Points)

1. Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso appreciates drastically against the U.S. dollar. This means
2. The owners of a business are the
3. Since its inception the euro has brought about revolutionary changes in European finance. For example,
4. An MNC can
5. Prior to the 1870s, both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. Suppose that the dollar was pegged to gold at $30 per ounce, the French franc is pegged to gold at 90 francs per ounce and to silver at 6 francs per ounce of silver, and the German mark pegged to silver at 1 mark per ounce of silver. What would the exchange rate between the U.S. dollar and German mark be under this system?
6. Under the gold standard, international imbalances of payment will be corrected automatically under the
7. Since the SDR is a “portfolio” of currencies
8. Following the demise of the Bretton Woods system, the IMF
9. The U.S. Trade Deficit
10. Credit entries in the U.S. balance of payments
11. Suppose the InBev Corporation (a non-U.S. MNC) buys the Anheuser-Busch Corporation, paying the U.S. shareholders cash.
12. When a country’s currency depreciates against the currencies of major trading partners,
13. The capital account measures
14. When the balance-of-payments accounts are recorded correctly, the combined balance of the current account, the capital account, and the reserves account must be
15. The central bank of the United States is
16. In the United States, managers are bound by the “duty of loyalty” to serve the shareholders.
17. The agency problem tends
18. If an incentive contract specifies certain accounting performance,
19. While debt can reduce agency costs between shareholders and management,
20. English common law countries tend to provide a stronger protection of shareholder rights than French civil law countries because
21. Even though compliance with the Cadbury Code of Best Practice is voluntary,
22. Most interbank trades are
23. A recent survey of U.S. foreign exchange traders measured traders’ perceptions about how fast news events that cause movements in exchange rates actually change the exchange rate. The survey respondents claim that the bulk of the adjustment to economic announcements regarding unemployment, trade deficits, inflation, GDP, and the Federal funds rate takes place within
24. Suppose you observe the following exchange rates: €1 = $1.60; £1 = $2.00. Calculate the euro[1]pound exchange rate.
25. Using the table above, what is the bid price of euro in terms of pounds?
26. For a U.S. trader working in American quotes, if the forward price is higher than the spot price
27. Bank dealers in conversations among themselves use a shorthand notation to quote bid and ask forward prices in terms of forward points. This is convenient because.
28. Based on the next table, calculate the EUR/AUD quote. Report 5 digits after the decimal point (X.XXXXX)
29. Based on the following table. What is the average annualized forward premium/discount for the EUR if you use the 1M forward contract (Format for answer: X.XX% or –X.XX%)
30. Suppose that the current exchange rate is €0.80 = $1.00. The direct quote, from the U.S. perspective is
31. The current spot exchange rate is $1.45/€ and the three-month forward rate is $1.55/€. Based upon your economic forecast, you are pretty confident that the spot exchange rate will be $1.50/€ in three months. Assume that you can trade €100,000. What actions would you take to speculate in the forward market? How much will you make if your prediction is correct?
32. Using the table shown, what is the most current spot exchange rate shown for British pounds? Use a direct quote from a U.S. perspective.
33. A dealer in British pounds who thinks that the pound is about to depreciate
34. Using the quotes from Exhibit 5.7, calculate the six-month forward cross-exchange rate for CHF/JPY (XXX.XX)
35. How high does the lending rate in the euro zone have to be before an arbitrageur would not consider borrowing dollars, trading for euro at the spot, investing in the euro zone and hedging with a short position in the forward contract?
36. The Efficient Markets Hypothesis states
37. An arbitrage is best defined as
38. Today’s rate for the USD/JPY is 124.30. Japan’s 1-year expected inflation is 0.4%. US 1-year expected inflation is 3.2%. What is the forecast for the pair for next year? (Format for answer: XX.XX)
39. Assume the following information regarding U.S. and European annualized interest rates:
40. Suppose that the annual interest rate is 2.7 percent in the United States and 3.6 percent in Germany, and that the EUR/USD spot exchange rate is 1.1050 and the forward exchange rate, with one-year maturity, is 1.1324. Assume that an arbitrager can borrow up to $1,000,000. If an astute trader finds an arbitrage, what is the net cash flow in one year? ($XX,XXX.XX)
41. If the interest rate in the U.S. is i$ = 5 percent for the next year and interest rate in the U.K. is i£ = 8 percent for the next year, uncovered IRP suggests that
42. In view of the fact that PPP is the manifestation of the law of one price applied to a standard commodity basket,
43. Suppose that the current EUR/GBP rate is 0.6675 and the one-year forward exchange rate is 0.6717. The one-year interest rate is 1.8% in euros and 2.1% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount. Suppose you are a Euro-based investor. Determine the profit/loss (in EUR, no cents) if you borrow in pounds and invest locally.
44. With regard to contractual size,
45. Suppose you observe the following one-year interest rates, spot exchange rates and futures prices. Futures contracts are available on €10,000. How much risk-free arbitrage profit could you make on one contract at maturity from this mispricing?
46. Which of the following options strategies are consistent in their belief about the future behavior of the underlying asset price?
47. If you think that the dollar is going to appreciate against the euro, you should
48. Assume today’s settlement price on a CME EUR futures contract is $1.3041/EUR. You have a long position in one contract. Your performance bond account currently has a balance of $1,700. The next day’ settlement price is $1.3076. Calculate the balance of the account at the end of the day. (USD, no cents)
49. The choice between a forward market hedge and a money market hedge often comes down to
50. Your firm is a U.K.-based importer of bicycles. You have placed an order with a Swiss firm for SFr. 1,000,000 worth of bicycles. Payment (in Swiss francs) is due in 12 months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how many contracts of what type and maturity.
51. Suppose that $2 = £1, $1.60 = €1, and the cross-exchange rate is €1.25 = £1.00. If you own a call option on £10,000 with a strike price of $1.50, you would exercise this option at maturity if
52. Your firm is a Swiss importer of bicycles. You have placed an order with a British firm for £1,000,000 worth of bicycles. Payment (in pounds sterling) is due in 12 months. Use a money market hedge to redenominate this one-year pound denominated payable into a Swiss franc[1]denominated payable with a one-year maturity. The following were computed without rounding. Select the answer closest to yours.
53. A U.S. firm has sold an Italian firm €1,000,000 worth of product. In one year the U.S. firm gets paid. To hedge, the U.S. firm bought put options on the euro with a strike price of $1.65. They paid an option premium $0.01 per euro. If at maturity, the exchange rate is $1.60,
54. Contingent exposure can best be hedged with
55. An exporter faced with exposure to a depreciating currency can reduce transaction exposure with a strategy of
56. Suppose that you are a U.S.-based importer of goods from the United Kingdom. You expect the value of the pound to increase against the U.S. dollar over the next 60 days. You will be making payment on a shipment of imported goods in 60 days and want to hedge your currency exposure. The U.S. risk-free rate is 4.4 percent, and the U.K. risk-free rate is 1.2 percent. These rates are expected to remain unchanged over the next 2 months. The current spot rate is $1.3077. Calculate the no-arbitrage price at which you could enter into a forward contract that expires in 60 days. (X.XXXX)
57. XYZ Corporation, located in the United States, has an accounts payable obligation of ¥705 million payable in one year to a bank in Tokyo. The current spot rate USDJPY = 105.64 and the one-year forward rate is 104.99. The annual interest rate is 1.3 percent in Japan and 3.1 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0095 per yen for a premium of 0.024 cents per yen. Assume that the forward rate is the best predictor of the future spot rate. The future dollar cost of meeting this obligation using the option hedge is
58. Your firm is a Swiss exporter of bicycles. You have sold an order to a French firm for €4,000,000 worth of bicycles. Payment from the French firm (in euros) is due in 12 months. Use a money market hedge to redenominate this one-year receivable into a Swiss franc-denominated receivable with a one-year maturity.
59. Suppose that Boeing Corporation exported a Boeing 747 to Lufthansa and billed €10 million payable in one year. The money market interest rates and foreign exchange rates are given as follows: On the maturity date of the contract Boeing will:
60. When the Mexican peso collapsed in 1994, declining by 37 percent,
61. Operating exposure can be defined as
62. Which of the following is true?
63. Generally speaking, a firm is subject to high degrees of operating exposure
64. Which of the following is a true statement?
65. Suppose you are a British venture capitalist holding a major stake in an e-commerce start-up in Silicon Valley. As a British resident, you are concerned with the pound value of your U.S. equity position. Assume that if the American economy booms in the future, your equity stake will be worth $916, and the exchange rate will be $1.34/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $765, and the exchange rate will be $1.38/£. You assess that the American economy will experience a boom with a 60 percent probability and a recession with the remaining probability. Estimate the variance of the £/$ spot rate (X.XXXXX)