Exam 18: Forward Exchange and International Financial Investment

A bank deposit in Germany denominated in euros is a Eurocurrency deposit.

In a _____ contract you can effectively lock in the price at which you buy or sell a foreign currency at a set date in the future.

Consider covered investments between the United States and Japan. If Japanese interest rates decrease, interest arbitrage operations will most likely result in a(n):

If a currency is at a forward premium by as much as its interest rate is lower than the interest rate in the other country, covered interest parity holds.

The current spot exchange rate is $1.14/euro. The current 90-day forward exchange rate is $1.11/euro. How could a U.S firm, who must repay a 40 million euro loan in 90 days, use a forward exchange contract to hedge its risk exposure?

Suppose the interest rate on 6-month treasury bills is 7 percent per year in the United Kingdom and 4 percent per year in the United States. Also, today's spot exchange price of the pound is $2.00 while the 6-month forward exchange price of the pound is $1.98. If the price of the 6-month forward pound were to _____, U.S. investors would see no return difference between covered U.K. investment and domestic U.S. investment.

Suppose that the U.S. dollar-pound sterling spot exchange rate equals $1.60/£, while the 360-day forward rate is $1.64/£. The yield on a one-year U.S. treasury bill is 9% and that on a one-year U.K. treasury bill is 8%. Calculate the covered interest differential in favor of London. On the basis of this result, which country would you expect to face capital inflows and which to face capital outflows?

Suppose the interest rate on one-year U.S. T-bills is 4% and interest rate on one-year British T-bills is 6.5%. If the dollar is at a forward premium against the British pound of 1%, an American investor who does not want to face exchange-rate risk (but does want to earn the highest possible return) should:

Suppose the interest rate on 6-month treasury bills is 7 percent per year in the United Kingdom and 4 percent per year in the United States. Also, today's spot exchange price of the pound is $2.00 while the 6-month forward exchange price of the pound is $1.98. By investing in U.K. treasury bills rather than U.S. treasury bills, and covering exchange-rate risk, U.S. investors earn an approximate extra return for 6 months of:

_____ means committing oneself to an uncertain future value of one's net worth in terms of home currency.

For an investor who starts with dollars and wants to end up with dollars in the future, which of the following choices is an example that includes speculating?

The profits and losses on a futures contract accrue to you daily, as the contract is "marked to market" daily.

An investment is _____ if it is fully hedged against exchange-rate risk.

Assume you are an American importer who must pay 500,000 euros at the end of 90 days when you receive 1,000 cases of French wine at your warehouse in New York. If you do not hedge this transaction, you face exchange-rate risk. The best way to remove the risk of loss due to currency fluctuations is to:

A _____ gives the holder the right but not the obligation to sell a foreign currency at some time in the future at a price set today.

If the interest rate of a foreign country is less than that of the domestic country, then the foreign country will have a positive forward premium on its currency.

If Canadian speculators expect the euro to appreciate against the U.S. dollar, they would:

Speculating in a position exposed to exchange-rate risk is the act of reducing or eliminating a net asset or net liability position in the foreign currency.

When the current $/£ forward rate is below the current spot rate, the pound is at a(n) _____.

_____ parity is the condition where the expected uncovered differential equals zero.