International Finance-1

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Assignment – A

Q1. What are implications of integration of global financial markets? Explain.

 

Q2. Explain

a) Interest rate parity

b) Reasons for introduction of Bretton woods system

 

 

Q3. What are Currency Swaps? Explain

 

 

Q4. Discuss the various kinds of risks involved in foreign exchange markets.

And how can we hedge them?

 

Q5. Define the following:

(A) Direct and Indirect quote

(B)Bid and Ask rate

 

 

ASSIGNMENT B

Q1. If FF/$=5.5885/5.5892

and $/Can $=0.6505/0.6512

Calculate the Implied cross rate.

 

Q2. What do you understand by transaction and translation exposure? How can these be hedged?

 

Q3. What are different kinds of derivative instruments? How are forwards different from future. Explain with example.

 

 

 

 

Case study

 

(a) Freda plum established the following spread on the Remco Corporation’s stock:

 

(i) Purchased one 3-month call option with a premium of $3 and an exercise price of $ 55.

 

(ii) Purchased one 3-month put option with a premium of $0.50 and an exercise price of $45.

 

The current market price of Remco is $50. Determine Freda’s profit or loss if (a) the price of Remco stays at $50 after 3 months, (b) the price of Remco falls to $35 after 3 months, and (c) the price of Remco rises to $60.

 

(b) How are investments in forex market analyzed? Discuss any two methods of evaluating investment proposals.

 

 

 

ASSIGNMENT C

 

 

 

MULTIPLE CHOICE QUESTIONS

 

1. Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The value of the Peruvian Sol in Canadian dollars is:

 

a. About .3621 Canadian dollars.

b. About .3977 Canadian dollars.

c. About 2.36 Canadian dollars.

d. About 2.51 Canadian dollars.

 

 

2. An increase in the current account deficit will place _______ pressure on the home currency value, other things equal.

 

A) Upward

B) Downward

C) no

D) Upward or downward (depending on the size of the deficit)

 

3. Which of the following is true?

 

A) Most forward contracts between firms and banks are for speculative purposes.

B) Most future contracts represent a conservative approach by firms to hedge foreign trade.

C) The forward contracts offered by banks have maturities for only four possible dates in the future.

D) None of the above

4. Which of the following statements is true?

a) A fixed exchange rate automatically cushions the economy’s output and employment by allowing an immediate change in the relative price of domestic and foreign goods.

b) A flexible exchange rate does not automatically cushion the economy’s output and employment by allowing an immediate change in the relative price of domestic and foreign goods.

c) A flexible exchange rate automatically cushions the economy’s output and employment by allowing an immediate change in the relative price of domestic and foreign goods.

d) A flexible exchange rate automatically cushions the economy’s output and employment by allowing an immediate change in the absolute price of domestic and foreign goods.

5. Under the gold standard,

a) Exchange rates did not change for long periods of time.

b) Businesses could trade and invest with little fear of exchange rates changes.

c) The price of each currency in terms of gold was fixed.

d) Inflation was a serious economic problem.

6. Punjab National Bank Mumbai Branch quoted USD 1= Rs 50.5000/52.5050. Which is the bid rate for USD?

 

a) 50.5000

b) b) 52.5050

c) 50.5050

d) d)52.5000

 

7. A company involved in foreign exchange transactions is exposed to______ risk.

 

a) Country risk

b) Currency risk

c) Counterparty risk

d) Exchange risk

 

 

8. Interest-rate parity refers to the concept that, where market imperfections are few,

 

a) The same goods must sell for the same price across countries.

b) Interest rates across countries will eventually be the same.

c) There is an offsetting relationship between interest rate differentials and differentials in the forward spot exchange market.

d) There is an offsetting relationship provided by costs and revenues in similar market environments.

 

 

9. Suppose that the Japanese yen is selling at a forward discount in the forward-exchange market. This implies that most likely

a) This currency has low exchange-rate risk.

b) This currency is gaining strength in relation to the dollar.

c) Interest rates are higher in Japan than in the United States.

d) Interest rates are declining in Japan.

 

10. If the dollar moves from 100 yen to 110 yen, then:

 

a) a the dollar has depreciated

b) the yen has appreciated

c) both of the above have occurred

d) none of the above have occurred

 

1. A nation’s currency will appreciate in the long run if the nation exhibits which of the following characteristics?

 

a) high inflation and high productivity growth

b) high productivity growth and increased tariffs on imports

c) high productivity growth and reduced tariffs on imports

d) none of the above

 

 

2. In the long run, the U.S. dollar appreciates if:

 

a) U.S. prices rise and U.S. productivity falls

b) *b. U.S. prices fall and the U.S. increases tariffs on imports

c) U.S. prices fall and the U.S. removes all import quotas

d) U.S. interest rates rise and the U.S. removes all tariffs on imported goods

 

 

13.In the short-run model of exchange rate determination, if we consider the U.S.-European exchange rate (euros per dollar), if the European Central Bank unexpectedly boosts interest rates, then this will cause the

 

a) euro to depreciate

b) dollar to appreciate

c) euro to appreciate

d) all of the above

 

14. The largest volume of activity in foreign exchange markets is related to:

 

a) international flows of financial capital

b) exports and imports

c) government transactions abroad

d) firms building plants abroad

 

 

15. When the Swiss franc appreciates (holding everything else constant), then

 

a) Swiss watches sold in the United States become more expensive.

b) American computers sold in Switzerland become more expensive.

c) Swiss army knives sold in the United States become cheaper.

d) American toothpaste sold in America becomes cheaper.

e) Both (a) and (d) of the above are true.

 

16. If the interest rate on dollar-denominated assets is 10% and it is 8% on euro-denominated assets, then if the euro is expected to appreciate at a 5% rate.

 

a) Dollar-denominated assets have a lower expected return than euro-denominated assets.

b) The expected return on dollar-denominated assets in euros is 2%.

c) The expected return on euro-denominated assets in dollars is 3%.

d) None of the above will occur.

 

 

17. All other things equal, an increase in inflation in Mexico shifts the supply of dollars _______, the demand for dollars to the _________, and causes a (n) _______ in the peso relative to the dollar.

 

a) right; left; appreciation

b) left; right; depreciation

c) right; left; depreciation

d) left; right; appreciation

 

 

18. When U.S. real interest rates rise, the

 

a) Expected returns for U.S. investments increases, and the dollar appreciates.

b) Expected return for U.S. investments decreases, and the dollar appreciates.

c) expected return U.S. investments increases, and the dollar depreciates

d) Expected return U.S. investments decreases, and the dollar depreciates.

 

19. A lower domestic money supply causes the domestic currency to

 

a) Depreciate more in the short run than in the long run.

b) Depreciate more in the long run than in the short run.

c) Appreciate more in the short run than in the long run.

d) Appreciate more in the long run than in the short run.

 

20. Which exchange rate system involves a strategy of “leaning against the wind?”

 

a) fixed exchange rates

b) floating exchange rates

c) managed floating exchange rates

d) pegged exchange rates

 

 

21. Market-determined exchange rates are best represented by a system of

 

a) fixed exchange rates

b) pegged exchange rates

c) managed floating exchange rates

d) floating exchange rates

 

 

22. An increase in the current account deficit will place _______ pressure on the home currency value, other things equal.

 

a) upward

b) downward

c) no

d) upward or downward (depending on the size of the deficit)

 

23. A weakening of the U.S. dollar with respect to the British pound would likely reduce the U.S. exports to Britain and increase U.S. imports from Britain.

a) True.

b) False.

 

 

24. Assume that a bank’s bid rate on Swiss francs is £0.25 and its ask rate is £0.26. Its bid-ask percentage spread is:

a) 4.00%.

b) 4.26%.

c) About 3.85%.

d) About 4.17%.

 

 

25. The strike price is also known as the premium price

a) True

b) False

 

 

 

 

26. The exchange rate is the:

(a) Total yearly amount of money changed from one country’s currency to another country’s currency

(b)Total monetary value of exports minus imports

(c) Amount of country’s currency which can be exchanged for one ounce of gold

(d)Price of one country’s currency in terms of another country’s currency

 

27. A multinational company that is faced with mild interference up to complete confiscation of all assets is encountering __________.

 

(a) Translation risk exposure

(b) Transactions risk exposure

(c) Political risk exposure

(d) A very bad day

 

28. The forward exchange rate __________.

(a) is the rate today for exchanging one currency for another for immediate delivery

(b) is the rate today for exchanging one currency for another at a specific future date

(c) is the rate today for exchanging one currency for another at a specific location on a specific future date

(d) is the rate today for exchanging one currency for another at a specific location for immediate delivery

 

29. The spot exchange rate

(a) is the rate today for exchanging one currency for another for immediate delivery

(b) is the rate today for exchanging one currency for another at a specific future date

(c) is the rate today for exchanging one currency for another at a specific location on a specific future date

(d) is the rate today for exchanging one currency for another at a specific location for immediate delivery

 

 

30. Flexible exchange rates insulates the economy better than fixed exchange rates

(a) against real and foreign monetary shocks

(b) against foreign monetary shocks only

(c) against real and domestic monetary shocks

(d) against domestic monetary shocks only

 

 

31. The forward market is especially well-suited to offer hedging protection against

(a) Translation risk exposure.

(b)Transactions risk exposure.

(c) Political risk exposure.

(d)Taxation.

 

 

32. The euro is the name for

(a) A currency deposited outside its country of origin.

(b)A bond sold internationally outside of the country in whose currency the bond is denominated.

(c) a common European currency

(d)a type of sandwich

 

 

33. The simplest method of currency translation is:

(a) monetary/nonmonetary

(b) temporal

(c) current rate

(d) current/noncurrent

 

34. Which of the following is not a type of indirect fund-adjustment method?

a) exposure netting

b) lags

c) transfer pricing

d) balance sheet hedge

 

35. Investing in interest-bearing instruments in foreign exchange and earning a profit due to interest rate and exchange rate differentials is

(a) Interest hedging.

(b) Interest optioning.

(c) Interest swapping.

(d) Interest arbitrage.

 

 

36. A U.S. company has an affiliate in Mexico. This affiliate has exposed assets of 200 million pesos and exposed liabilities of 300 million pesos. If the exchange rate appreciates from $0.0004 per peso to $0.0005 per peso, what is the company’s translation gain or loss?

(a) -$10,000

(b) -$15,000

(c) +$10,000

(d) +$15,000

 

 

37. The temporal method of currency translation is almost similar to the monetary/non monetary method except the following _____.

(a) accounts receivable at historical cost

(b) accounts receivable at market price

(c) fixed assets at historical cost

(d) inventory can be at historical cost

 

 

38. All of the following are hedges against exchange-rate risk EXCEPT

(a) Balancing monetary assets and liabilities.

(b)Use of spot market.

(c) Foreign-currency swaps.

(d)Adjustment of funds commitments between countries.

 

 

39. Purchasing-power parity (PPP) refers to__________.

(a) the concept that the same goods should sell for the same price across countries after exchange rates are taken into account

(b) the concept that interest rates across countries will eventually be the same

(c) the orderly relationship between spot and forward currency exchange rates and the rates of interest between countries

(d) the natural offsetting relationship provided by costs and revenues in similar market environments

 

 

40. Assume the nominal interest rates (annual) in the country of Fredonia and the United States are 6% and 12% respectively. What is the implied 90-day forward rate if the current spot rate is 5 Fredonia marks (FM) per U.S. dollar?

(a) 4.732

(b) 4.927

(c) 5.074

(d) 5.283