Exam 24: Risk Management

Assume PPP holds at a time when the exchange rate is DM1.09/$(Canadian) and a market basket of goods costs DM500.How many Dollars would you expect to spend on the goods? Germany is expecting 10% inflation while Canada is expecting 4% inflation.What would you predict to happen to exchange rates?

The six-month forward quote for German mark is DM1.6/US$, and the spot price of German mark is DM1.7/US$.Which of the following statements is true?

Which of the following is correct when foreign currency is contracted in the forward market?

What would you expect to be the relationship between real rates of interest in Japan and Canada if inflation is expected to be 3% in Japan and 6% in Canada?

Would you be willing to exchange Dollars for pounds at a rate of $2.40(Canadian)/ $\le$ to invest in London and earn a one-year rate of 10%, as opposed to investing in Canada for a 5% return? What things might you first consider before investing?

Indirect quotes describe units of domestic currency bought by a unit of foreign unit.

What are some simple strategies to protect the firm against exchange rate risk?

How much would you expect to receive for a nominal interest rate in Holland if funds can be invested in the U.S.at a rate of 7% when inflation is expected to be 4% in the U.S.and 8% in Holland?

What is the basic difference between hedgers and speculators?

What is the international Fisher effect and how would you test it, knowing that 6% inflation is expected in Canada but only 3% is expected in Spain.The nominal Canadian interest rate is 9%.

If the direct exchange rate between U.S.Dollars and pounds sterling is 1.50/1, how much should you be willing to pay to receive 350 pounds?

What is the law of one price? When would you expect it to hold and when would you not expect it to hold?

Explain the expectations theory of exchange rates.

If the direct quote for French franc(FF) is $0.22/$(Canadian), then the indirect quote for French franc will be:

Buying currency in the forward market is a costly way of hedging the currency risk.

What is the expected spot rate of */$(Canadian) one year from now if the current spot rate is *66/$and the Yen is selling one-year forward at *70/$?

During the 1980s, the Japanese Yen appreciated against the U.S.Dollar.As a result of this, the Japanese products became less price competitive in the U.S.This is an example of:

The Japanese Yen exchange rate is *115 = $1, while the British Pound exchange rate is $\le$ 1 = $2.05.Given this information, calculate the cross-rate in terms of Yen per pound.

What would you expect to occur if the rate of expected inflation in Canada is considerably lower than expected inflation in Germany?

Which of the following appears to be a safe assumption when there is no difference between the forward and spot exchange rates between two currencies?