Deck 8: Foreign Exchange Risk and Forecasting

Question 1

Suppose that the 1-year forward rate of dollar per Swiss franc is $0.42,the current spot rate $/SFr is $0.40,and the expected future spot rate $/SFr is $0.45.The expected premium equals to:

A) - 7.5%
B) 5%
C) 6.67%
D) 12.5%

Answer 1

12.5%

Question 2

The uncovered interest rate parity UIRP indicates that the interest rate differential is approximately equal to___________.

A) expected premium
B) risk premium
C) forward premium
D) exchange rate premium

Answer 2

expected premium

Question 3

A U.S.firm has a €1 million payment due to a Dutch firm in 90 days.The current spot rate is $1.00 per euro,and the 90-day forward rate is $1.11.Ben forecasts that the spot rate in 90 days will be $0.99.Jerry forecasts that the spot rate will be $1.12 in 90 days.The actual spot rate in 90 days turns out to be $1.10.If the U.S.firm follows Jerry's forecast,it would:

A) buy euro in the forward market at$1.11.
B) wait and buy euro 90 days later at $1.10.
C) buy euro now at $1.12 and let it sit in the company's safe.
D) wait and buy euro in the forward market 90 days later at $1.11.

Answer 3

buy euro in the forward market at$1.11.

Question 4

Risk premium equals to:

A) expected premium minus forward premium.
B) expected premium plus forward premium.
C) forward premium minus expected premium.
D) exchange rate premium plus forward premium.

Question 5

A U.S.importer has to pay SKr1 million to a Swedish firm in 60 days.The current spot rate is $0.5 per Swedish krona,and the 60-day forward rate is $0.65.Bob forecasts that the spot rate in 60 days will be $0.45.Jane forecasts that the spot rate will be $0.85 in 60 days.The actual spot rate in 60 days turns out to be $0.68.Whose advice,between Bob and Jane,will save the company's money?

A) Bob
B) Jane
C) Both Bob and Jane
D) Neither Ben nor Jane

Question 6

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 uncovered international investment?

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 7

________ exposure is the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last transaction.

A) Transaction
B) Translation
C) Structural
D) Conversion

Question 8

Boeing,Inc.sold an airplane to Singapore Airlines for SGD100 million Singapore dollars with terms of one-year payment.The current spot rate $0.25 per SGD.Boeing expects to exchange SGD100 million at next year's spot rate when payment is received.If the spot rate for the SGD declines to $0.24 one year from today,what is Boeing's potential transaction gain or loss?

A) Transaction gain of $1 million
B) Transaction gain of $2 million
C) Transaction loss of $1 million
D) Transaction loss of $2 million

Question 9

If the Hong Kong subsidiary of a U.S.firm has net exposed assets of HK$ 500,000 and the HK$ changes in value from US$0.50/HK$ toUS$0.30/HK$,the U.S.firm will have a translation ________.

A) loss HK$100,000
B) loss US$100,000
C) gain US$100,000
D) gain US$ 50,000

Question 10

The six-month interest rate in the United States is 10 percent; in Mexico it is 16 percent.The current spot rate dollars per peso is $0.20.The annualized six-month forward rate equal to ______ and peso is selling at a forward _______.

A) 0.188, discount
B) 0.212, premium
C) 0.194, discount
D) 0.206, premium

Question 11

Suppose that the 1-year forward rate of dollar per Swiss franc is $0.42,the current spot rate $/SFr is $0.40,and the expected future spot rate $/SFr is $0.45.The forward premium equals to:

A) - 7.5%
B) 5%
C) 6.67%
D) 12.5%

Question 12

A U.S.importer has to pay SKr1 million to a Swedish firm in 60 days.The current spot rate is $0.5 per Swedish krona,and the 60-day forward rate is $0.65.Bob forecasts that the spot rate in 60 days will be $0.45.Jane forecasts that the spot rate will be $0.85 in 60 days.The actual spot rate in 60 days turns out to be $0.68.If the U.S.importer believes Jane's forecast,it would:

A) buy SKr in the forward market at $0.65.
B) wait and buy SKr 60 days later at $0.68.
C) buy SKr now at $0.68 and let it sit in the company's safe.
D) wait and buy SKr in the forward market 60 days later at $0.65.

Question 13

Risk aversion implies that

A) reckless drivers will pay higher insurance premium than safe drivers.
B) for the same returns, investors prefer low risk investment to high risk investment.
C) People with higher default risk must pay higher interest rates than people with good credit.
D) All of the above are correct.

Question 14

A U.S.firm has a €1 million payment due to a Dutch firm in 90 days.The current spot rate is $1.00 per euro,and the 90-day forward rate is $1.11.Ben forecasts that the spot rate in 90 days will be $0.99.Jerry forecasts that the spot rate will be $1.12 in 90 days.The actual spot rate in 90 days turns out to be $1.10.Whose advice,between Ben and Jerry,will save the company's money?

A) Ben
B) Jerry
C) Both Ben and Jerry
D) Neither Ben nor Jerry

Question 15

A U.S.firm has a €1 million payment due to a Dutch firm in 90 days.The current spot rate is $1.00 per euro,and the 90-day forward rate is $1.11.Ben forecasts that the spot rate in 90 days will be $0.99.Jerry forecasts that the spot rate will be $1.12 in 90 days.The actual spot rate in 90 days turns out to be $1.10.If the U.S.firm follows Ben's forecast,it would:

A) buy euro in the forward market at$1.11.
B) wait and buy euro 90 days later at $1.10.
C) buy euro now at $1.12 and let it sit in the company's safe.
D) wait and buy euro in the forward market 90 days later at $1.11.

Question 16

When the parent company consolidates financial statements from foreign subsidiaries,

A) Exchange rate values can affect the translation gains or losses.
B) The translation gains or losses always accurately represent the subsidiaries' actual operating gains or losses.
C) The translation gains or losses always exaggerate the actual operating gains or losses of the foreign subsidiaries.
D) The translation gains or losses always understate the actual operating gains or losses of the foreign subsidiaries.

Question 17

The covered interest rate parity CIRP indicates that the interest rate differential is approximately equal to___________.

A) expected premium
B) risk premium
C) forward premium
D) exchange rate premium

Question 18

The potential effect of exchange rate fluctuations on future cash flows of the direct foreign investment is expressed as _____ exposure.

A) translation
B) transaction
C) conversion
D) economic

Question 19

Suppose that the 1-year forward rate of dollar per Swiss franc is $0.42,the current spot rate $/SFr is $0.40,and the expected future spot rate $/SFr is $0.45.The risk premium equals to:

A) - 7.5%
B) 5%
C) 6.67%
D) 12.5%

Question 20

Let F_t be the forward rate,S_t be the spot exchange rate,and S^e_t+1 be the expected future spot rate.Which of the following expressions represents the risk premium?

A)
B)
C)
D)

Question 21

Suppose that the 1-year forward rate of dollar per pound is $1.32,the current spot rate $/pound is $1.20,and the expected future spot rate $/pound is $1.40.The forward premium on the pound is:

A) -6.7%
B) 5.7%
C) 10%
D) 16.7%

Question 22

The ________ in the forward exchange market is equal to the effective return differential.

A) Strike price
B) Exposure risk
C) Future spot exchange rate
D) Risk premium

Question 23

One way businesses reduce foreign exchange risks is to speed up the rate of payments of currencies expected to appreciate.

Question 24

Which forecasting technique uses the past movements in the exchange rate movements to predict the future level?

A) Structural
B) Hedging
C) Atheoretical
D) Flow

Question 25

The foreign exchange _______ is the difference between the forward exchange rate and the expected future spot exchange rate.

A) Risk premium
B) Exposure
C) Strike price
D) Leverage point

Question 26

Which of the following best describes translation exposure?

A) Operating banks in a remote location with an uncommon language
B) Accounting exposure from translating interest rates from different regions
C) Translating financial statements from one currency to another
D) Creating more than one offshore branch

Question 27

Suppose for two currencies the forward premium is 4% and the expected premium is 8%.Then the risk premium is:

A) -4%
B) -2%
C) 2%
D) 4%

Question 28

Suppose that the 1-year forward rate of dollar per peso is $11.25,the current spot rate $/peso is $10.00,and the expected future spot rate $/peso is $11.50.The risk premium on the peso is:

A) -2.5%
B) 12.5%
C) 15%
D) 22.75%

Question 29

The effective return differential in the forward exchange market is equal to the strike price.

Question 30

Exposure from the uncertain currency value of a foreign-denominated transaction to be completed at some future date describes:

A) Information exposure
B) Translation exposure
C) Transaction exposure
D) Economic exposure

Question 31

Which of the following best describes economic exposure?

A) The sensitivity of the domestic currency value of future operating income to unexpected changes in exchange rate.
B) The risk of operating in politically risky countries.
C) When a business leaves only one branch to operate in a foreign country.
D) Exposure from uncertainty about the currency value of a foreign-denominated transaction to be fulfilled in the future.

Question 32

In the "uncovered interest rate parity," the forward rate is assumed to include a ________.

A) Return differential
B) Exposure risk
C) Risk premium
D) Future spot exchange rate

Question 33

Information exposure is a type of foreign exchange risk.

Question 34

Which of the following describe ways that a business manages foreign exposure?
I.Hedge in the futures market
II.Hedge in the options market
III.Slow payments of currencies expected to appreciate
IV.Slow collections of currencies expected to depreciate

A) I only
B) I and II
C) III and IV
D) II, III, and IV

Question 35

Suppose that the 1-year forward rate of dollar per peso is $11.25,the current spot rate $/peso is $10.00,and the expected future spot rate $/peso is $11.50.The expected premium on the peso is:

A) -2.5%
B) 12.5%
C) 15%
D) 22.75%

Question 36

In the "uncovered interest rate parity," the forward rate is assumed to be the unbiased predictor of the future spot exchange rate.

Question 37

Investors would be willing to hold foreign investments even if the foreign investments yield lower expected returns than the domestic investments,if there is a negative risk premium on domestic currency.

Question 38

Which of the following is not a type of foreign exchange risk?

A) Information exposure
B) Translation exposure
C) Transaction exposure
D) Economic exposure

Question 39

Suppose that the 1-year forward rate of dollar per peso is $11.25,the current spot rate $/peso is $10.00,and the expected future spot rate $/peso is $11.50.The forward premium on the peso is:

A) -2.5%
B) 12.5%
C) 15%
D) 22.75%

Question 40

Which of the following describe ways that a business manages foreign exposure?
I.Hedge in the goods market
II.Hedge in the forward market
III.Rush payments of currencies expected to appreciate
IV.Rush collections of currencies expected to depreciate

A) I only
B) I and II
C) II, III, and IV
D) I, II, III, and IV

Question 41

If the foreign exchange market is efficient,the forward exchange rate would differ from the expected future spot exchange rate only by an ________.

A) Strike price
B) Exposure risk
C) Future spot exchange rate
D) Risk premium

Question 42

Suppose for two currencies the forward premium is 8.5% and the expected premium is 5%.Then the risk premium is:

A) -13.5%
B) -3.5%
C) 3.5%
D) 13.5%

Question 43

If the foreign exchange market is efficient,the forward exchange rate would differ from the expected future spot exchange rate only by a risk premium.

Question 44

The foreign exchange exposure premium is the difference between the forward exchange rate and the expected future spot exchange rate.

Question 45

Economic exposure is the sensitivity of the domestic currency value of future operating income to unexpected changes in exchange rate.

Question 46

Which forecasting technique uses a fundamental-based model with information that is thought to be important to changes in exchange rates?

A) Structural
B) Hedging
C) Atheoretical
D) Flow

Question 47

Suppose that the 1-year forward rate of dollar per pound is $1.32,the current spot rate $/pound is $1.20,and the expected future spot rate $/pound is $1.40.The risk premium on the pound is:

A) -6.7%
B) 5.7%
C) 10%
D) 16.7%

Question 48

Suppose that the 1-year forward rate of dollar per pound is $1.32,the current spot rate $/pound is $1.20,and the expected future spot rate $/pound is $1.40.The expected premium on the pound is:

A) -6.7%
B) 5.7%
C) 10%
D) 16.7%

Question 49

The degree to which a firm is affected by exchange rate changes is known as currency risk.

Question 50

The variability of the firm's foreign exchange risk arises from uncertainty about future exchange rates.

Question 51

In foreign exchange forecasting,what is a "good" forecast?

A) When the forecast encourages the firm to buy.
B) When the forecast is close.
C) When the forecast is high.
D) When the forecast predicts the right hedging strategy.

Question 52

Investors would be willing to hold foreign investments even if the foreign investments yield lower expected returns than the domestic investments,if:

A) There is a negative risk premium on domestic currency.
B) The foreign exchange market is efficient.
C) The foreign currency carries no risk premium.
D) There is a positive risk premium on domestic currency.