Sample Multiple Choice Spring 2018 (Mid-Term)

1. Currency forwards obtained by an exporter through a bank or FX dealer:

a. contain a commitment for exporter, and are standardized
b. contain a commitment for exporter, & is tailored to his/her desire.
c. contain a commitment for bank, & is tailored to the bank’s needs.
d. none of the above

2. If the home interest rate exceeds foreign interest rate, Interest Rate Parity implies:
a. inflation rates of both countries will be the same
b. home currency is selling at a forward premium
c. foreign currency is expected to depreciate
d. home currency is expected to depreciate

3. You (U.S. firm) hedge your yen receivables against depreciation by:
a. selling yen futures
b. buying yen futures
c. buying yen forward
d. none of the above

4. The U.S. dollar suddenly changes in value against the euro moving from an exchange rate of
$0.8909/euro to $0.08709/euro. Thus, the dollar has ________ by ________.
A) appreciated; 2.30%
B) depreciated; 2.30%
C) appreciated; 2.24%
D) depreciated; 2.24%

5. The forward Swiss franc, relative to $, given spot rate of SF1.5400 and a 3 month forward rate of
SF1.5600 is approximately equal to (annualized):
a. 5.13% premium
b. 5.60% discount
c. 5.60% premium
d. 5.13% discount
e. 1.28% premium

6. When discussing the structure of corporate governance, the authors distinguish between internal and
external factors. _____is an example of an internal factor, and ______is an example of an external factor.
a. Equity markets; executive management
b. Debt markets; board of directors
c. Executive management; auditors
d. Auditors; regulators

7. You enter a non-deliverable forward contract to sell €1 million for Norwagian krone in one year for
Nkr7.8240/€, what is your gain or loss if spot rate one year later is Nkr8.0/€?
a. zero
b. loss of €176,000
c. loss of Nkr 176,000
d. gain of Nkr 176,000
8. In one sentence, define SDRs.

9. Under a fixed exchange rate regime, the government of the country is officially responsible for
a. intervention in the foreign exchange markets using gold and reserves.
b. setting the fixed/parity exchange rate.
c. maintaining the fixed/parity exchange rate.
d. all of the above.

10. Arguments against dollarization in emerging markets include:

a. US$ providing level of stability
b. US$ could fall in value
c. loss of central bank controlling monetary policy
d. increased risk of hyper-inflation

11. The current U.S. dollar-yen spot rate is 85¥/$. If the 90-day forward exchange rate is 88 ¥/$ then the
yen is selling at a per annum ________ of ________.
a. premium; 1.57%
b. premium; 6.30%
c. discount; 3.41%
d. discount; 13.64%

12. With covered interest arbitrage,

a. the market must be out of equilibrium.
b. a "riskless" arbitrage opportunity exists.
c. the arbitrageur trades in both the spot and future currency exchange markets.
d. all of the above

13. A speculator that has ________ a futures contract has taken a ________ position.
a. sold; long b. purchased; short
c. sold; short d. purchased; short

14. A foreign currency ________ option gives the holder the right to ________ a foreign currency
whereas a foreign currency ________ option gives the holder the right to ________ an option.
a. call, buy, put, sell b. call, sell, put, buy
c. put, hold, call, release d. none of the above

15. Assume that the spot rate is US$0.85/C$. The Canadian and US inflation rates are expected to be 4%
and 3% respectively. What should be the spot rate for C$ in 6 months, per PPP?
a. $0.8542/ C$ b. $0.8458/C$
c. $0.8418 / C$ d. $0.8583/C$
 Answers:

(1) b Forwards are customized and binding contracts

(2) d Currency with a higher interest rate is expected to depreciate in the future

(3) a
ARs in foreign currency  short futures or buy puts or in money market hedge borrow the PV of foreign
currency

(4) a.
Euro has depreciated and $ has appreciated. Make $ the reference currency and compute the % change.

(5) d
(Hint: note indirect quote) Use formula for forward premium/discount = ((F – S) / S ) (12 / n) (100)

(6) c See Book Chapter 2

(7) c
(contracted to sell € 1 million to buy Nkr 7.824 million ; but in the spot market krone has fallen in value
and you could have sold € 1 million in the market and gotten Nkr 8 million.
So you lose Nkr 176,000

(8) See Slide Notes #1 / Book Chapter on International Monetary System

(9) d See Book Chapter 3

(10) c Dollarization means no local central bank and no control over money supply.

(11). d
Question is about yen. Make yen the reference and find the % change in yen.
Or use formula: ((S – F) / F) (12 / 4) (100) = - 13.64% discount

(12) d

(13) c
Sold a contract is bearish and the speculator is short

(14) a
It is just a definition – this is stuff you learned in FIN 3710

(15) b
(1.015 / 1.02) ($0.85 / C$)