Exam 18: Forward Exchange and International Financial Investment

Covered interest parity is rarely found to hold empirically.

If the expected uncovered interest differential is _____, then the expected overall return favors uncovered investing in the foreign-denominated currency.

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. Suppose that you have not covered this transaction in the forward market. In which of the following cases will you suffer the largest loss?

Concerning the covering of exchange rate risks, assuming that a depreciation of the domestic currency is feared, one can say that there is an incentive for:

Hedging 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 uncovered interest parity holds, it means that:

The act of taking a net asset position or a net liability position in some asset class is referred to as _____.

Assume you are a Chinese exporter and expect to receive $250,000 at the end of 60 days. You can remove the risk of loss due to a devaluation of the dollar by:

Company X is a perfume manufacturer and one of its popular products involves rosewood. It is deeply concerned with the market price fluctuations of rosewood. To protect this, it enters into a contract which would allow the company to buy rosewood at a specific price at a given future date. This is an example of:

The proportionate difference between the current forward exchange rate value of a currency and its current spot value is the _____ premium.

If an investor starts with dollars and wants to end up with dollars in the future, which of the following is NOT an investment choice that can be made?

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 one-year forward premium against the British pound of 3%, the covered interest differential is:

Suppose the interest rate in the U.K. is 4% for 90 days, the current spot rate is $2.00/£, and the 90-day forward rate is $1.96/£. If the covered interest rate differential is about zero, then the interest rate in the U.S. for 90 days is:

An investment exposed to exchange-rate risk is a(n) _____ international investment.

Uncovered interest arbitrage is buying a country's currency spot and selling that country's currency forward, to make a net profit from the combination of the difference in interest rates between countries and the forward premium on the country's currency.

Which of the following is true for forward foreign exchange contracts?

If the forward premium of the euro is positive, the exchange market's consensus appears to be that over the period of a forward contract, the spot exchange rate value of the euro will:

The covered interest differential is _____ the sum of the forward premium on a currency and the interest rate differential.

_____ is buying a country's currency spot and selling that country's currency forward, to make a net profit from the combination of the difference in interest rates between countries and the forward premium on the country's 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 of a covered international investment?