Question 1

Which one of the following is NOT a reason for using hedges such as a synthetic forward?

Accepted Answer

A)  In some currency markets, forward contracts may not be available, but they can be manufactured using a money market hedge. 
B)  Individual companies are not able to borrow and lend at the interest rates available in the interbank market. 
C)  When time horizons are long, forward contracts can be expensive as the bid-ask spread widens substantially. 
D)  It may be unfavorable to consider borrowing and lending to hedge one's currency risk. 
A)  In some currency markets, forward contracts may not be available, but they can be manufactured using a money market hedge. 
B)  Individual companies are not able to borrow and lend at the interest rates available in the interbank market. 
C)  When time horizons are long, forward contracts can be expensive as the bid-ask spread widens substantially. 
D)  It may be unfavorable to consider borrowing and lending to hedge one's currency risk. D

Question 2

If interest rate parity is satisfied,there are no opportunities for covered interest arbitrage.What does this imply about the relationship between spot and forward exchange rates when the foreign currency money market investment offers a higher return than the domestic money market investment?

Accepted Answer

If the foreign currency money market investment offers a higher return (in the foreign currency)than the domestic money market investment,the foreign currency must be at a discount in terms of the domestic currency in the forward market.The forward discount locks in a capital loss when the transaction exchange risk is offset,which reduces the higher return of the foreign currency back to the lower return offered in the domestic money market.

Question 3

When the possibility exists that the government of a nation may impose some form of exchange controls or tax on foreign investment,the risk is known as ________ risk.

Accepted Answer

A)  political 
B)  exchange controls 
C)  business risk 
D)  government 
A)  political 
B)  exchange controls 
C)  business risk 
D)  government A

Question 4

A bond that promises to pay the owner a single payment denominated in euros or pounds is known as a ________ bond.

Accepted Answer

A)  debenture 
B)  variable interest rate 
C)  pure discount 
D)  foreign 
A)  debenture 
B)  variable interest rate 
C)  pure discount 
D)  foreign

Question 5

The empirical evidence indicates that interest rate parity is the norm,especially during periods of financial market ________.

Accepted Answer

A)  arbitrage 
B)  turbulence 
C)  profit-taking 
D)  tranquility 
A)  arbitrage 
B)  turbulence 
C)  profit-taking 
D)  tranquility

Question 6

If the underlying transaction gives you a liability,denominated in foreign currency,the general principal behind a money market hedge states you need an equivalent ________ in the money market to provide a hedge.

Accepted Answer

A)  liability 
B)  asset 
C)  forward contract 
D)  foreign bank account 
A)  liability 
B)  asset 
C)  forward contract 
D)  foreign bank account

Question 7

Given an example of how a money market hedge is constructed?

Accepted Answer

If the underlying business transaction g

Question 8

Identify an external currency market and how it operates?

Accepted Answer

An external currency market is an interb

Question 9

When it is said that there exists covered interest arbitrage opportunities,the term covered means the arbitrage is not exposed to

Accepted Answer

A)  exchange rate risk. 
B)  manipulation by speculators. 
C)  central bank interventions. 
D)  government actions against the arbitrageurs. 
A)  exchange rate risk. 
B)  manipulation by speculators. 
C)  central bank interventions. 
D)  government actions against the arbitrageurs.

Question 10

When there are no intervening cash flows between the time a deposit is made and the maturity of the deposit,the interest rates are said to be ________.

Accepted Answer

A)  discount rate 
B)  compound interest rate 
C)  covered interest rate 
D)  spot interest rates 
A)  discount rate 
B)  compound interest rate 
C)  covered interest rate 
D)  spot interest rates

Question 11

If interest rate parity is in effect,there are ________.

Accepted Answer

A)  no profitable opportunities for covered interest arbitrage 
B)  many opportunities for covered interest arbitrage 
C)  currency dealers will arbitrage interest rate differentials in different countries 
D)  currency dealers will be motivated to arbitrage forward market contracts 
A)  no profitable opportunities for covered interest arbitrage 
B)  many opportunities for covered interest arbitrage 
C)  currency dealers will arbitrage interest rate differentials in different countries 
D)  currency dealers will be motivated to arbitrage forward market contracts

Question 12

If volatility in foreign exchange markets,what is the relationship to the bid-ask spread?

Accepted Answer

The bid-ask spread compensates the bank'

Question 13

Explain the bid-ask spread in the external currency market?

Accepted Answer

The bid-ask spread in the external curre

Question 14

When the forward premium or discount on the foreign currency equals the interest 	differential between the domestic and foreign interest rates divided by one plus the foreign interest rate,what is being satisfied?

Accepted Answer

A)  covered interest arbitrage 
B)  interest rate parity 
C)  domestic and foreign interest rates 
D)  spot and forward exchange rates 
A)  covered interest arbitrage 
B)  interest rate parity 
C)  domestic and foreign interest rates 
D)  spot and forward exchange rates

Question 15

When one of the counterparties to an agreement globally may possibly fail to honor its contract,it is known as ________ risk.

Accepted Answer

A)  interest rate 
B)  business 
C)  transaction 
D)  default 
A)  interest rate 
B)  business 
C)  transaction 
D)  default

Question 16

When parity conditions are not in effect in currency and money markets,traders could make extraordinary profits from a practice known as ________.

Accepted Answer

A)  covered interest rate parity 
B)  covered interest rate arbitrage 
C)  triangular arbitrage 
D)  forward market arbitrage 
A)  covered interest rate parity 
B)  covered interest rate arbitrage 
C)  triangular arbitrage 
D)  forward market arbitrage

Question 17

Which one of the following would be the most logical reason to use a synthetic forward contract to hedge?

Accepted Answer

A)  forward contracts are not available in the currency of choice 
B)  when time horizons are short, forward contracts can be expensive 
C)  the underlying transaction is too risky 
D)  the underlying transaction gives you an asset 
A)  forward contracts are not available in the currency of choice 
B)  when time horizons are short, forward contracts can be expensive 
C)  the underlying transaction is too risky 
D)  the underlying transaction gives you an asset

Question 18

What is the name for the bank market for deposits and loans that is denominated in a currency different to the currency of the country in which a bank is operating?

Accepted Answer

A)  internal currency market 
B)  foreign exchange market 
C)  external currency market 
D)  interbank market 
A)  internal currency market 
B)  foreign exchange market 
C)  external currency market 
D)  interbank market

Question 19

What is the name of the interbank interest rate used in external currency markets that is the most important and used in various cities globally in contractual loan agreements?

Accepted Answer

A)  the fed funds rate 
B)  twelfth district interest rate 
C)  LIBOR 
D)  the U.S. prime rate 
A)  the fed funds rate 
B)  twelfth district interest rate 
C)  LIBOR 
D)  the U.S. prime rate

Question 20

Interbank interest rates in various cities around the world are often the basis for interest rates in contractual loan agreements.What is the most important of these rates?

Accepted Answer

A)  London Interbank Offer Rate (LIBOR) 
B)  Frankfurt Interbank Offer Rate (FIBOR) 
C)  Hong Kong Interbank Offer Rate (HIBOR) 
D)  Euro Interbank Offer Rate (EURIBOR) 
A)  London Interbank Offer Rate (LIBOR) 
B)  Frankfurt Interbank Offer Rate (FIBOR) 
C)  Hong Kong Interbank Offer Rate (HIBOR) 
D)  Euro Interbank Offer Rate (EURIBOR)

Exam 6: Interest Rate Parity

Which one of the following is NOT a reason for using hedges such as a synthetic forward?

If interest rate parity is satisfied,there are no opportunities for covered interest arbitrage.What does this imply about the relationship between spot and forward exchange rates when the foreign currency money market investment offers a higher return than the domestic money market investment?

When the possibility exists that the government of a nation may impose some form of exchange controls or tax on foreign investment,the risk is known as ________ risk.

A bond that promises to pay the owner a single payment denominated in euros or pounds is known as a ________ bond.

The empirical evidence indicates that interest rate parity is the norm,especially during periods of financial market ________.

If the underlying transaction gives you a liability,denominated in foreign currency,the general principal behind a money market hedge states you need an equivalent ________ in the money market to provide a hedge.

Given an example of how a money market hedge is constructed?

Identify an external currency market and how it operates?

When it is said that there exists covered interest arbitrage opportunities,the term covered means the arbitrage is not exposed to

When there are no intervening cash flows between the time a deposit is made and the maturity of the deposit,the interest rates are said to be ________.

If interest rate parity is in effect,there are ________.

If volatility in foreign exchange markets,what is the relationship to the bid-ask spread?

Explain the bid-ask spread in the external currency market?

When the forward premium or discount on the foreign currency equals the interest differential between the domestic and foreign interest rates divided by one plus the foreign interest rate,what is being satisfied?

When one of the counterparties to an agreement globally may possibly fail to honor its contract,it is known as ________ risk.

When parity conditions are not in effect in currency and money markets,traders could make extraordinary profits from a practice known as ________.

Which one of the following would be the most logical reason to use a synthetic forward contract to hedge?

What is the name for the bank market for deposits and loans that is denominated in a currency different to the currency of the country in which a bank is operating?

What is the name of the interbank interest rate used in external currency markets that is the most important and used in various cities globally in contractual loan agreements?

Interbank interest rates in various cities around the world are often the basis for interest rates in contractual loan agreements.What is the most important of these rates?

Globalization and the Multinational Corporation

The Foreign Exchange Market

Forward Markets and Transaction Exchange Risk

The Balance of Payments

Exchange Rate Systems

Speculation and Risk in the Foreign Exchange Market

Purchasing Power Parity and Real Exchange Rates

Measuring and Managing Real Exchange Risk

Exchange Rate Determination and Forecasting

International Debt Financing

International Equity Financing

International Capital Market Equilibrium

Country and Political Risk

International Capital Budgeting

Additional Topics in International Capital Budgeting

Risk Management and the Foreign Currency Hedging Decision

Financing International Trade

Managing Net Working Capital

Foreign Currency Futures and Options

Interest Rates and Foreign Currency Swaps

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