Exam 16: Foreign Exchange Derivative Markets

The exchange rate between two foreign (nondollar) currencies is known as a(n):

In the Wall Street Journal, you observe that the British pound (£) is quoted at $1.65. The Australian dollar (A$) is quoted at $0.60. What is the value of the Australian dollar in British pounds?

The Smithsonian Agreement allowed for a devaluation of the dollar and for a widening of the boundaries within which currencies were allowed to fluctuate.

Which of the following statements is incorrect?

If the spot rate of the British pound is $2, and the 180-day forward rate is $2.05, what is the annualized premium or discount?

Financial institutions rarely use the forward market.

The forward rate premium is dictated by the national income differential of the two currencies.

S. inflation suddenly becomes much higher than European inflation, the U.S. demand for European goods will ____. In addition, the supply of euros to be sold for dollars will ____; both forces will place ____ pressure on the value of the euro.

Purchasing power parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries.

According to interest rate parity, if the interest rate in a foreign country is ____ than in the home country, the forward rate of the foreign country will have a ____.

If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a ____ position in dollars.

The following information refers to Fresno Bank and Champaign Bank.

If the U.S. government imposed trade restrictions on U.S. imports, this would ____ the U.S. demand for foreign currencies and would place ____ pressure on the values of foreign currencies (withrespect to the dollar).

Exchange rates usually change precisely as suggested by the purchasing power parity (PPP) theory.

Which of the following is not a method of forecasting exchange rate volatility?

If the quoted cross-exchange rate between two foreign currencies is not aligned with the two corresponding exchange rates, investors can profit from triangular arbitrage.

The speculative risk of purchasing a ____ is that the foreign currency's value ____ over time.

If the forward rate of a foreign currency ____ the existing spot rate, the forward rate will exhibit a ____.

The act of capitalizing on the discrepancy between the forward rate premium and the interest rate differential is called

Assume that a British pound put option has a premium of $.03 per unit and an exercise price of $1.60. The present spot rate is $1.61. The expected future spot rate on the expiration date is $152. The option will be exercised on this date, if at all. What is the expected per unit net gain (or loss) resulting from purchasing the put option?