Question 1

By using forward contracts an importer can avoid transaction risk.

Accepted Answer

A) True 
 B)False

Question 2

What can be said about the spot exchange rate of Dollars for pounds if nominal interest rates are higher in Canada than in Great Britain?

Accepted Answer

A) It should exceed the forward rate of Dollars for pounds 
B) It should be less than the forward rate of Dollars for pounds 
C) It is expected to increase 
D) It is expected to remain constant 
A) It should exceed the forward rate of Dollars for pounds 
B) It should be less than the forward rate of Dollars for pounds 
C) It is expected to increase 
D) It is expected to remain constant

Question 3

If real interest rates are different across countries, investors will shift their money into countries with high real interest rates.

Accepted Answer

A) True 
 B)False

Question 4

High inflation rates are usually associated with:

Accepted Answer

A) Low nominal interest rates 
B) High nominal interest rates 
C) High real interest rates 
D) Low real interest rates 
A) Low nominal interest rates 
B) High nominal interest rates 
C) High real interest rates 
D) Low real interest rates

Question 5

You have decided to hedge your exchange-rate risk in your U.S.-based firm by contracting forward to buy 500,000 Swiss Francs for delivery in one year.The current exchange rate is Sf1.6/$.The forward rate is Sf1.7/$(U.S.).How much better (worse) off are you if you don't buy the forward contract and instead pay the spot rate in one year if it turns out to be Sf1.65/$?

Accepted Answer

A) ($14,245) 
B) ($8,912) 
C) $8,912 
D) $27,472 current Dollar commitment = 
A) ($14,245) 
B) ($8,912) 
C) $8,912 
D) $27,472 current Dollar commitment =

Question 6

Which of the following statements is correct?

Accepted Answer

A) A currency with higher interest rate will sell at a forward discount 
B) A currency with higher interest rate will sell at a forward premium 
C) A currency with higher interest rate will have a higher spot rate 
D) A currency with higher interest rates will have a lower spot rate 
A) A currency with higher interest rate will sell at a forward discount 
B) A currency with higher interest rate will sell at a forward premium 
C) A currency with higher interest rate will have a higher spot rate 
D) A currency with higher interest rates will have a lower spot rate

Question 7

If managers intend to adjust the projections of foreign investments, it is probably better to make the adjustments in:

Accepted Answer

A) The discount rate used 
B) The cash flows projected 
C) Both the discount rate and cash flows 
D) Exchange rate, but never in the discount rate 
A) The discount rate used 
B) The cash flows projected 
C) Both the discount rate and cash flows 
D) Exchange rate, but never in the discount rate

Question 8

The Yen is currently trading at *105.89 per USD, while the forward rate is *102.33 per USD.Given this information, calculate the forward premium.

Accepted Answer

A) 3.48% 
B) 5.48% 
C) 7.48% 
D) 9.48% 
A) 3.48% 
B) 5.48% 
C) 7.48% 
D) 9.48%

Question 9

Why should interest rate parity mean that the forward premium should equal the interest rate differential between countries?

Accepted Answer

If this were not the case, then investor

Question 10

Transaction risk arises when a firm is committed either to pay or receive a known amount of foreign currency.

Accepted Answer

A) True 
 B)False

Question 11

How can companies use swaps to change the risk of securities that they have issued?

Accepted Answer

Swaps allow firms to exchange one series

Question 12

Arbitrageurs are said to look for riskless profits by:

Accepted Answer

A) Contracting in the forward exchange markets 
B) Buying at the spot rate and selling at the forward rate 
C) Buying in one market and selling in another to take advantage of different prices for the same good 
D) Buying short-term bonds and converting them to long-term bonds 
A) Contracting in the forward exchange markets 
B) Buying at the spot rate and selling at the forward rate 
C) Buying in one market and selling in another to take advantage of different prices for the same good 
D) Buying short-term bonds and converting them to long-term bonds

Question 13

Current one-year interest rates are 4% and 8% in Canada and Spain respectively.The anticipated inflation in Canada is 2%.If international Fisher effect holds, what is the expected inflation in Spain?

Accepted Answer

A) 4.00% 
B) 4.04% 
C) 5.92% 
D) 6.00% real interest (Canadian) = 
A) 4.00% 
B) 4.04% 
C) 5.92% 
D) 6.00% real interest (Canadian) =

Question 14

If the interest rate of one country increases, then the value of that country's currency increases in the forward market.

Accepted Answer

A) True 
 B)False

Question 15

The Yen is currently trading at *109.66 per USD, while the forward rate is *112.96 per USD.Given this information, calculate the forward premium or discount.

Accepted Answer

A) 5.92% premium 
B) 2.92% premium 
C) 5.92% discount 
D) 2.92% discount 
A) 5.92% premium 
B) 2.92% premium 
C) 5.92% discount 
D) 2.92% discount

Question 16

If Purchasing Power Parity is holding, what will happen to the currency of a country with high inflation?

Accepted Answer

A) Currency will appreciate 
B) Currency will depreciate 
C) No significant change in exchange rate 
D) Currency will sell at a forward premium 
A) Currency will appreciate 
B) Currency will depreciate 
C) No significant change in exchange rate 
D) Currency will sell at a forward premium

Question 17

Forward contracts are standardized contracts sold in organized exchanges.

Accepted Answer

A) True 
 B)False

Question 18

If you are a currency speculator, you will always make money by:

Accepted Answer

A) Buying currency with high interest rate 
B) Buying currency with low interest rate 
C) Accurately predicting whether exchange rate will change more or less than the interest rate differential 
D) Buying the currency with the highest interest rate differential 
A) Buying currency with high interest rate 
B) Buying currency with low interest rate 
C) Accurately predicting whether exchange rate will change more or less than the interest rate differential 
D) Buying the currency with the highest interest rate differential

Question 19

Suppose the interest rate on 1-year loans in the United States is 5% while in the United Kingdom the interest rate is 6%.The spot exchange rate is $1.55/$\le$ and the forward rate is $1.54/$\le$.In what country would you choose to borrow? To lend? Can you profit from this situation?

Accepted Answer

The interest rate in the U.S.is 5%.Borro

Question 20

According to the theory of purchasing power parity, exchange rates will adjust so that differences in:

Accepted Answer

A) Interest rates across countries are offset 
B) Forward rates across countries are offset 
C) Expected inflation across countries is offset 
D) International Fisher rates are offset 
A) Interest rates across countries are offset 
B) Forward rates across countries are offset 
C) Expected inflation across countries is offset 
D) International Fisher rates are offset

Exam 24: Risk Management

By using forward contracts an importer can avoid transaction risk.

What can be said about the spot exchange rate of Dollars for pounds if nominal interest rates are higher in Canada than in Great Britain?

If real interest rates are different across countries, investors will shift their money into countries with high real interest rates.

High inflation rates are usually associated with:

Which of the following statements is correct?

If managers intend to adjust the projections of foreign investments, it is probably better to make the adjustments in:

The Yen is currently trading at *105.89 per USD, while the forward rate is *102.33 per USD.Given this information, calculate the forward premium.

Why should interest rate parity mean that the forward premium should equal the interest rate differential between countries?

Transaction risk arises when a firm is committed either to pay or receive a known amount of foreign currency.

How can companies use swaps to change the risk of securities that they have issued?

Arbitrageurs are said to look for riskless profits by:

Current one-year interest rates are 4% and 8% in Canada and Spain respectively.The anticipated inflation in Canada is 2%.If international Fisher effect holds, what is the expected inflation in Spain?

If the interest rate of one country increases, then the value of that country's currency increases in the forward market.

The Yen is currently trading at *109.66 per USD, while the forward rate is *112.96 per USD.Given this information, calculate the forward premium or discount.

If Purchasing Power Parity is holding, what will happen to the currency of a country with high inflation?

Forward contracts are standardized contracts sold in organized exchanges.

If you are a currency speculator, you will always make money by:

Suppose the interest rate on 1-year loans in the United States is 5% while in the United Kingdom the interest rate is 6%.The spot exchange rate is $1.55/ ≤\le≤ and the forward rate is $1.54/ ≤\le≤ .In what country would you choose to borrow? To lend? Can you profit from this situation?

According to the theory of purchasing power parity, exchange rates will adjust so that differences in:

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Conclusion

What We Do and Do Not Know About Finance

Filters

The Yen is currently trading at 105.89 per USD, while the forward rate is 102.33 per USD.Given this information, calculate the forward premium.

The Yen is currently trading at 109.66 per USD, while the forward rate is 112.96 per USD.Given this information, calculate the forward premium or discount.

Suppose the interest rate on 1-year loans in the United States is 5% while in the United Kingdom the interest rate is 6%.The spot exchange rate is $1.55/ $\le$ and the forward rate is $1.54/ $\le$ .In what country would you choose to borrow? To lend? Can you profit from this situation?