Question 1

An unhedged international investment has a speculative element to it, and it is called a covered international investment.

Accepted Answer

A) True 
 B)False

Question 2

Suppose the interest rate on 6-month treasury bills is 7 percent per year in the United Kingdom and 4 percent per year in the United States. Also, today's spot exchange price of the pound is $2.00 while the 6-month forward exchange price of the pound is $1.98. Consider the expected future spot rate of pounds is $2.04. By investing in U.K. treasury bills rather than U.S. treasury bills, and NOT covering exchange-rate risk, the approximate extra return earned by U.S. investors for 6 months will be:

Accepted Answer

A) 0.5 percent. 
B) 5.0 percent. 
C) 3.0 percent. 
D) 3.6 percent.

Question 3

When would a currency speculator buy a put option and when would it be worth exercising the option? What are some advantages and disadvantages of currency options compared to forward exchange contracts?

Accepted Answer

The answer of When would a currency speculator buy a...

Question 4

In a currency swap two parties agree to exchange flows of different bonds during a specified time period.

Accepted Answer

A) True 
 B)False

Question 5

For an investor who starts with dollars and wants to end up with dollars in the future, which of the following choices is an example that includes hedging?

Accepted Answer

A) Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy the foreign currency 
B) Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy dollars 
C) Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and then buy dollars at the future spot rate 
D) Buy a dollar-denominated financial asset

Question 6

If Canada has a current 90 day forward exchange rate value for its currency that is above the current spot exchange rate value of its currency, then the Canadian 90-day interest rate is relatively high.

Accepted Answer

A) True 
 B)False

Question 7

If the covered interest differential is zero, then:

Accepted Answer

A) covered international investments will be profitable once we add in the interest earned on the foreign bonds. 
B) covered interest rate parity has not yet been reached. 
C) the overall covered return on a foreign-currency investment equals the return on a comparable domestic-currency investment. 
D) a currency is at a forward premium by as much as its interest rate is higher than the interest rate in the other country.

Question 8

An import-export business that finds itself in a "short" foreign-currency position risks a financial loss if:

Accepted Answer

A) it pays attention to exchange rate forecasts. 
B) foreign demand for its product rises (more than expected). 
C) the domestic currency depreciates (more than expected).. 
D) the foreign currency depreciates (more than expected)..

Question 9

Assume that the three-month forward exchange rate is $2.00/£ and a speculator believes that the spot rate in three months will be $2.05/£. How can this person speculate in the forward market? Also assume that the speculator is willing to take a position of about $20 million or £10 million. How much will the speculator earn if he or she is correct?

Accepted Answer

The answer of Assume that the three-month forward exchange rate...

Question 10

For an investor who starts with dollars and wants to end up with dollars in the future, which of the following choices is an example of an uncovered international investment?

Accepted Answer

A) Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy the foreign currency 
B) Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy dollars 
C) Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and then buy dollars at the future spot rate 
D) Buy a dollar-denominated financial asset

Question 11

Empirical studies suggest that, during normal times in the past two decades, covered interest rate parity applies almost perfectly to Eurocurrency markets for major currencies.

Accepted Answer

A) True 
 B)False

Question 12

Consider the case of a U.S. investor holding dollars and deciding whether to invest in Japanese treasury bills or in U.S. treasury bills. Assume that the investor wants to end up holding dollars. What are the three methods available to this investor to turn present dollars into future dollars? In your answer present an equation that shows the return per dollar invested under each method. Which of these methods is the riskiest and why?

Accepted Answer

The answer of Consider the case of a U.S. investor...

Question 13

Suppose that the dollar-yen spot exchange rate is $0.05/¥ and the 90-day forward exchange rate is $0.06/¥. Assuming that covered interest parity holds, are Japanese interest rates higher or lower than U.S. interest rates? Explain why.

Accepted Answer

The answer of Suppose that the dollar-yen spot exchange rate...

Question 14

Using actual market exchange rates and comparable short-term interest rates for the major currencies:

Accepted Answer

A) uncovered interest parity is easier to test than covered interest parity. 
B) we see that covered interest parity holds better between the currencies of countries that impose broad capital controls. 
C) we see that deviations from uncovered interest parity occur only during times of crisis. 
D) we see that covered interest parity usually holds well.

Question 15

Which of the following financial instruments provides a buyer the right (but not the obligation) to purchase or sell a fixed amount of currency at a prearranged price, within a few days to a few years?

Accepted Answer

A) Letter of credit 
B) Currency option 
C) Currency swap 
D) Forward contract

Question 16

Consider the interaction between U.S. dollars and U.K. pounds. When the forward premium on the dollar is zero, it means:

Accepted Answer

A) the current spot price of dollars equals the future spot price of dollars. 
B) the future spot price of dollars will be equal to the current forward price of dollars. 
C) the current forward price of dollars equals the current spot price of dollars. 
D) the spot exchange rate value of the pound is moving toward $1 per pound.

Question 17

What is the empirical evidence on the holding of the covered and uncovered interest rate parity? How is the evidence different after the relaxation of capital controls in the early 1980s?

Accepted Answer

The answer of What is the empirical evidence on the...

Question 18

If the spot price of the euro is $1.10 per euro and the 30-day forward rate is $1.00 per euro, and you believe that the spot rate in 30 days will be $1.05 per euro, then you can try to maximize speculative gains by:

Accepted Answer

A) buying euros in the current spot market and selling euros in 30 days at the future spot rate. 
B) signing a forward foreign exchange contract to sell euros in 30 days. 
C) signing a forward foreign exchange contract to sell dollars in 30 days. 
D) buying dollars in the spot market and selling the dollars in 30 days at the future spot rate.

Question 19

The interest rate is 4% in the U.K. and 3% in the U.S. for 90 days. The current spot rate is $2.00/£ and the forward rate is $1.96/£. If a U.S. based investor expects the spot rate to remain at $2.00/£ in 90 days, the expected uncovered interest rate differential would have to be _____ in favor of the _____ investment.

Accepted Answer

A) 2%; dollar 
B) 2%; pound 
C) 1%; dollar 
D) 1%; pound

Question 20

Forward exchange contracts are used for hedging but not for speculating.

Accepted Answer

A) True 
 B)False

Exam 18: Forward Exchange and International Financial Investment

An unhedged international investment has a speculative element to it, and it is called a covered international investment.

When would a currency speculator buy a put option and when would it be worth exercising the option? What are some advantages and disadvantages of currency options compared to forward exchange contracts?

In a currency swap two parties agree to exchange flows of different bonds during a specified time period.

For an investor who starts with dollars and wants to end up with dollars in the future, which of the following choices is an example that includes hedging?

If Canada has a current 90 day forward exchange rate value for its currency that is above the current spot exchange rate value of its currency, then the Canadian 90-day interest rate is relatively high.

If the covered interest differential is zero, then:

An import-export business that finds itself in a "short" foreign-currency position risks a financial loss if:

For an investor who starts with dollars and wants to end up with dollars in the future, which of the following choices is an example of an uncovered international investment?

Empirical studies suggest that, during normal times in the past two decades, covered interest rate parity applies almost perfectly to Eurocurrency markets for major currencies.

Suppose that the dollar-yen spot exchange rate is $0.05/¥ and the 90-day forward exchange rate is $0.06/¥. Assuming that covered interest parity holds, are Japanese interest rates higher or lower than U.S. interest rates? Explain why.

Using actual market exchange rates and comparable short-term interest rates for the major currencies:

Which of the following financial instruments provides a buyer the right (but not the obligation) to purchase or sell a fixed amount of currency at a prearranged price, within a few days to a few years?

Consider the interaction between U.S. dollars and U.K. pounds. When the forward premium on the dollar is zero, it means:

What is the empirical evidence on the holding of the covered and uncovered interest rate parity? How is the evidence different after the relaxation of capital controls in the early 1980s?

If the spot price of the euro is $1.10 per euro and the 30-day forward rate is $1.00 per euro, and you believe that the spot rate in 30 days will be $1.05 per euro, then you can try to maximize speculative gains by:

Forward exchange contracts are used for hedging but not for speculating.