Q1. What are different kinds of risks involved in dealing in foreign exchange market? Explain.
a) Theory of Comparative advantage
b) Reasons for introduction of Bretton woods system
Q3. What are currency swaps? Explain
Q4. What are implications of integration of global financial markets? Explain.
Q5. Define the following:
(A) Direct and Indirect quote
(B) Bid and Ask rate
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.
(a) You are given following information:
3 Month swap points 25/35
Spot $/£ =1.6105/1.6120
3 month swap =35/25
Calculate 3 month DM/£ rate
(b)What do you mean by exchange rate forecasting? Explain any two models of exchange rate forecasting?
ASSIGNMENT – C
1. Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The value of the Peruvian Sol in Canadian dollars is:
a. about .3621 Canadian dollars.
b. about .3977 Canadian dollars.
c. about 2.36 Canadian dollars.
d. about 2.51 Canadian dollars.
2. _______ is not a bank characteristic important to customers in need of foreign exchange.
a. Speed of execution
b. Forecasting advice
c. Advice about current market conditions
d. All of the above are important bank characteristics to customers in need of foreign exchange.
3. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ________ by _______%.
A) depreciated; 5.80
B) depreciated; 4.00
C) appreciated; 5.80
D) appreciated; 4.00
4.. An increase in the current account deficit will place _______ pressure on the home currency value, other things equal.
D) upward or downward (depending on the size of the deficit)
5. Forward contracts:
A) contain a commitment to the owner, and are standardized.
B) contain a commitment to the owner, and can be tailored to the desire of the owner.
C) contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.
D) contain a right but not a commitment to the owner, and are standardized.
6. 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
7. Which one of the following is an advantage of international investing?
a) you can invest in industries that don’t exist in the United States
b) you can invest in companies that have lower price-earnings ratios
c) you can invest in companies that are, on average, more profitable than similar U.S. firms
d) you can invest in companies with lower market-book value ratios
8. 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.
9. 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.
10. Punjab National Bank Mumbai Branch quoted USD 1= Rs 50.5000/52.5050. Which is the bid rate for USD?
b) b) 52.5050
11. A company involved in foreign exchange transactions is exposed to______ risk.
a) country risk
b) currency risk
c) counterparty risk
d) exchange risk
12.Which of the following is a legitimate reason for international investment?
a) Dividends from a foreign subsidiary are tax exempt in the United States
b) Most governments do not tax foreign corporations
c) There are possible benefits from international diversification.
d) International investments have less political risk than domestic investments
13. 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.
14. 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.
15. 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) foreign-currency swaps
16. 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
17.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
18. In the long run, the U.S. dollar appreciates if:
a) U.S. prices rise and U.S. productivity falls
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
19. 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
20. The underlying axiom of the purchasing power parity theory is:
a) the principle of comparative advantage
b) the interest parity condition
c) the principle of opportunity cost
d) the law of one price
21. Suppose that purchasing power parity holds, and that the current exchange rate between the dollar and the yen is 110 yen/$. If inflation in the U.S. runs at 4 percent and inflation in Japan runs at 2 percent, next year we would expect the exchange rate to be roughly
a) 112 yen/$
b) 108 yen/$
c) 116 yen/$
d) 102 yen/$
22. 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
23. 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.
24. The theory of purchasing-power parity indicates that if the price level in the United States rises by 5% while the price level in Mexico rises by 6%, then
a) the dollar appreciates by 1% relative to the peso.
b) the dollar depreciates by 1% relative to the peso.
c) the exchange rate between the dollar and the peso remains unchanged.
d) the dollar appreciates by 5% relative to the peso.
e) the dollar depreciates by 5% relative to the peso.
25. 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.
26. 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
27. 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.
28. If the interest rate on dollar deposits is 10 percent, and the dollar is expected to appreciate by seven percent over the coming year, then the expected return on the dollar deposit in terms of foreign currency is
29. 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.
30. The gold standard was essentially a
a) fixed exchange rate system
b) floating exchange rate system
c) managed floating exchange rate system
d) all of the above
31. If the Federal Reserve wants the dollar to appreciate, it will likely adopt a
a) expansionary monetary policy
b) contractionary monetary policy
c) expansionary fiscal policy
d) contractionary fiscal policy
32. 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
33. 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
34. An increase in the current account deficit will place _______ pressure on the home currency value, other things equal.
d) upward or downward (depending on the size of the deficit)
35. The primary component of the current account is the:
a) balance of trade.
b) balance of money market flows.
c) balance of capital market flows.
d) unilateral transfers.
36. 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.
37. 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:
c) about 3.85%.
d) about 4.17%.
38. The strike price is also known as the premium price
39. The forward rate is the exchange rate used for immediate exchange of currencies
40. In general, when speculating on exchange rate movements, the speculator will borrow the currency that is expected to appreciate and invest in the country whose currency is expected to depreciate.