Exam 9: Foreign Exchange Markets

A U.S. bank has made £12 million worth of loans and £10 million worth of deposits in Britain. The bank would benefit from a drop in the value of the pound against the dollar.

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Question 1

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False

Is it reasonable to expect real rates of interest to be identical across countries? Explain. What does this imply about parity?

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Question 2

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Among developed economies,real interest rates are probably similar,but not identical. Real interest rates will differ across countries due to differences in risk (sovereign,exchange,credit,and liquidity risks)and due to differences in taxation,tariffs,capital controls,and so forth. The difference between real interest rates in developed and lesser-developed economies will be quite a bit greater. In these cases,the simple parity conditions may not hold or may have little practical significance.

If you can convert 150 Swiss francs to $90,the exchange rate is 1.67 francs per dollar.

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Question 3

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True

A U.S. bank borrowed dollars,converted them to euros,and invested in euro-denominated CDs to take advantage of interest rate differentials. To cover the currency risk the investor should

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Question 4

A U.S. firm agrees to import textiles from Hong Kong and pay in 90 days. The invoice requires payment in Hong Kong dollars. The U.S. importer could hedge this currency risk by buying the HK dollar forward.

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Question 5

A U.S. firm has borrowed £50 million from a British firm. The borrower will need to convert dollars to pounds to repay the loan when it is due. The U.S. firm could hedge the exchange rate risk by

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Question 6

What are the major purposes of the foreign exchange markets?

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Question 7

A Swiss bank converted 1 million Swiss francs to euros to make a euro loan to a customer when the exchange rate was 1.85 francs per euro. The borrower agreed to repay the principal plus 3.75 percent interest in one year. The borrower repaid euros at loan maturity and when the loan was repaid the exchange rate was 1.98 francs per euro. What was the bank's franc rate of return?

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Question 8

If the dollar appreciates relative to the Euro then:

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Question 9

If a foreign currency appreciates,that country's goods and services become relatively more expensive for U.S. buyers.

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Question 10

A U.S. FI has US$200 million worth of one-year loans earning an average rate of return of 6 percent. The FI also has one-year single-payment Canadian dollar loans of C$110 million earning 8 percent. The FI's funding source is $300 million in US$ one-year CDs,on which they are paying 4 percent. Initially the exchange rate is C$1.10 per US$1. The one-year forward rate is C$1.14 per US$1. What is the bank's dollar percent spread if they hedge fully using forwards?

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Question 11

A bank has committed to deliver yen in six months to a corporate customer. The spot rate is 110 yen to the dollar and the six-month forward rate is 105 yen per dollar. Are there costs to hedging this exposure with the forward market? Explain.

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Question 12

The levels of foreign currency assets and liabilities at banks have in recent years,and the level of foreign currency trading has .

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Question 13

An FI's position in FX markets generally reflects four trading activities. What are they,and which one(s)cause the FI to bear FX risk?

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Question 14

Explain how a drop in the value of the dollar could affect the U.S. import and export sectors.

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Question 15

Banks' net foreign exposure is equal to

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Question 16

The agreement that ended the era of fixed exchange rates for the major economies was called the

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Question 17

If the United States has inflation of 3 percent and Europe has inflation of 5 percent,the value of the euro should increase,ceteris paribus.

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Question 18

If a firm has more foreign currency assets than liabilities,and no other foreign currency transactions,it has

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Question 19

A U.S. bank converted $1 million to Swiss francs to make a Swiss franc loan to a valued corporate customer when the exchange rate was 1.2 francs per dollar. The borrower agreed to repay the principal plus 5 percent interest in one year. The borrower repaid Swiss francs at loan maturity and when the loan was repaid the exchange rate was 1.3 francs per dollar. What was the bank's dollar rate of return?

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Question 20

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Exam 9: Foreign Exchange Markets

A U.S. bank has made £12 million worth of loans and £10 million worth of deposits in Britain. The bank would benefit from a drop in the value of the pound against the dollar.

Is it reasonable to expect real rates of interest to be identical across countries? Explain. What does this imply about parity?

If you can convert 150 Swiss francs to $90,the exchange rate is 1.67 francs per dollar.

A U.S. bank borrowed dollars,converted them to euros,and invested in euro-denominated CDs to take advantage of interest rate differentials. To cover the currency risk the investor should

A U.S. firm agrees to import textiles from Hong Kong and pay in 90 days. The invoice requires payment in Hong Kong dollars. The U.S. importer could hedge this currency risk by buying the HK dollar forward.

A U.S. firm has borrowed £50 million from a British firm. The borrower will need to convert dollars to pounds to repay the loan when it is due. The U.S. firm could hedge the exchange rate risk by

What are the major purposes of the foreign exchange markets?

If the dollar appreciates relative to the Euro then:

If a foreign currency appreciates,that country's goods and services become relatively more expensive for U.S. buyers.

A bank has committed to deliver yen in six months to a corporate customer. The spot rate is 110 yen to the dollar and the six-month forward rate is 105 yen per dollar. Are there costs to hedging this exposure with the forward market? Explain.

The levels of foreign currency assets and liabilities at banks have ________ in recent years,and the level of foreign currency trading has ________.

An FI's position in FX markets generally reflects four trading activities. What are they,and which one(s)cause the FI to bear FX risk?

Explain how a drop in the value of the dollar could affect the U.S. import and export sectors.

Banks' net foreign exposure is equal to

The agreement that ended the era of fixed exchange rates for the major economies was called the

If the United States has inflation of 3 percent and Europe has inflation of 5 percent,the value of the euro should increase,ceteris paribus.

If a firm has more foreign currency assets than liabilities,and no other foreign currency transactions,it has

Introduction

Determinants of Interest Rates

Interest Rates and Security Valuation

The Federal Reserve System, monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Filters

The levels of foreign currency assets and liabilities at banks have in recent years,and the level of foreign currency trading has .