Question 1

A firm wants to hedge a potential transaction but is also concerned about a possibility that it may not take place.In this case it is better to hedge potential risks using

Accepted Answer

Options provide the firm the right but not the obligation to execute the transaction. This means that if the transaction does not take place, the firm can choose not to exercise the option and avoid any losses from the hedge. This would not be possible with forwards or futures, which are binding contracts that require execution regardless of whether or not the transaction ultimately takes place.

Question 2

A ________ strategy replicates the forward contract by borrowing in one currency,converting to the other currency and investing in the new currency.

Accepted Answer

A cash-and-carry strategy involves borrowing in one currency, converting to the other currency, and investing in the new currency. This replicates the forward contract, and can be used as an alternative to a futures contract. Therefore, the best choice for the given scenario is A) cash-and-carry.

Question 3

The one-year forward exchange rate is Rupees 50/$.If the one-year interest rate in the United States is 5% and in India is 8%,what is the spot exchange rate so as to preclude arbitrage?

Accepted Answer

The answer of The one-year forward exchange rate is Rupees...

Question 4

IBM enters into a forward contract to purchase 200,000 euros at a rate of $1.90/euro one year from today.If the spot exchange rate is $2/euro one year later,what is the dollar amount that IBM must pay to receive the euros.

Accepted Answer

If IBM had purchased euros in the spot market, they would've paid $2/euro, which means 200,000 euros would have cost them $400,000.

However, IBM entered into a forward contract and agreed to purchase euros at a rate of $1.90/euro, regardless of the spot exchange rate one year later.

Therefore, IBM will only pay 200,000 euros x $1.90/euro = $380,000 in one year, regardless of the spot exchange rate.

Thus, the answer is (C) $380,000.

Question 5

IBM enters into a forward contract to purchase 100,000 euros at a rate of $1.60/euro one year from today.If the spot exchange rate is $2/euro one year later,what is the dollar amount that IBM must pay to receive the euros.

Accepted Answer

According to the forward contract, IBM agreed to purchase 100,000 euros at a rate of $1.60/euro, which means IBM agreed to pay $160,000 (100,000 euros x $1.60/euro). However, one year later, the spot exchange rate is $2/euro. Therefore, to receive 100,000 euros, IBM needs to pay $200,000 (100,000 euros x $2/euro). Therefore, the dollar amount that IBM must pay to receive the euros is $200,000, which is option B.

Question 6

A Brazilian firm owes you $2,000,000,payable in three months,however,they insist on paying in Brazilian Reals.The current spot exchange rate is $0.59305/Real.The three-month forward exchange rate is $0.61255/Real.How many Real should you demand in a forward contract to receive $2.000.000 in three months to hedge the exchange rate risk?

Accepted Answer

To calculate the amount of Real needed to receive $2,000,000 in three months, we need to use the forward exchange rate since the payment will be made in three months.

2,000,000 / 0.61255 = 3,265,040 Real

Therefore, the answer is C.

Question 7

A ________ exchange rate is the rate that a firm can tie in for a future transaction date.

Accepted Answer

A forward exchange rate is the rate at which a firm can lock in a future transaction date, allowing them to hedge against potential currency fluctuations. Fixed exchange rates are set by governments and do not change, while floating exchange rates fluctuate based on supply and demand in the market. Therefore, the best choice is B) forward.

Question 8

________ give a firm an option but not an obligation to exchange currency at a given rate.

Accepted Answer

Currency options give a firm the right but not the obligation to exchange currency at a given rate. Currency forwards, futures, and exchanges all involve an obligation to exchange currency at a specified rate in the future.

Question 9

The spot exchange rate for the British pound is 0.6 pounds/dollar.The one-year interest rate in the United States is 5% and the one-year interest rate in Britain is 6%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?

Accepted Answer

The answer of The spot exchange rate for the British...

Question 10

Firms use forward foreign exchange contracts rather than a cash-and-carry strategy because

Accepted Answer

All of the given reasons are why firms use forward foreign exchange contracts rather than a cash-and-carry strategy. Forward contracts eliminate transaction costs, allows firms to avoid borrowing in different currencies, and do not require credit quality considerations. This makes forward contracts a more straightforward and efficient choice for managing currency risk.

Question 11

The spot exchange rate for the British pound is 0.65 pounds/dollar.The one-year interest rate in the United States is 5% and the one-year interest rate in Britain is 7%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?

Accepted Answer

According to the uncovered interest rate parity (UIP), the forward exchange rate should reflect the interest rate differential between the two countries. In the absence of arbitrage, the forward exchange rate can be calculated using the formula:

Forward exchange rate = Spot exchange rate × (1 + foreign interest rate) ÷ (1 + domestic interest rate)

Substituting the given values:

Forward exchange rate = 0.65 × (1 + 0.07) ÷ (1 + 0.05) = 0.662

Therefore, choice C is the correct answer.

Question 12

The spot exchange rate for the British pound is 0.5 pounds/dollar.The one-year interest rate in the United States is 4% and the one-year interest rate in Britain is 5%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?

Accepted Answer

The forward exchange rate can be calculated using the interest rate parity formula: Forward Rate = Spot Rate * (1 + Interest Rate of Domestic Country) / (1 + Interest Rate of Foreign Country). Here, Forward Rate = 0.5 * (1 + 0.04) / (1 + 0.05) = 0.5 * 1.04 / 1.05 = 0.505.

Question 13

The one-year forward exchange rate is Rupees 40/$.If the one-year interest rate in the United States is 4% and in India is 7%,what is the spot exchange rate so as to preclude arbitrage?

Accepted Answer

The correct answer is A because the spot exchange rate should be such that there is no incentive for arbitrage. In this case, the spot exchange rate should be such that the cost of buying $1 in the spot market and investing it in the United States for one year is equal to the cost of buying $1 in the forward market and investing it in India for one year.The cost of buying $1 in the spot market and investing it in the United States for one year is:$1 * (1 + 0.04) = $1.04The cost of buying $1 in the forward market and investing it in India for one year is:$1 * (1 + 0.07) * (1 / 40) = $1.04Therefore, the spot exchange rate should be 40/1.04 = 38.88.

Question 14

If a firm hedges a future purchase of euros by purchasing a call option,the firm ________ the potential cost but will benefit if the euro ________.

Accepted Answer

By purchasing a call option, the firm caps the maximum cost of purchasing euros but can still benefit if the euro appreciates, as it can buy euros at a lower price than the market rate.

Question 15

A ________ is written between a firm and a bank and it fixes the currency exchange rate for a transaction that will occur at a future date.

Accepted Answer

A currency forward contract is specifically designed to fix the exchange rate for a future transaction. Currency options contracts (choices B and C) give the holder the flexibility to choose whether to buy or sell a currency at a certain price, but do not necessarily fix the exchange rate. Choice D, a currency put option, is a type of currency options contract where the holder has the right to sell a currency at a certain price, but again, this does not necessarily fix the exchange rate for a future transaction.

Question 16

The one-year forward exchange rate is Rupees 45/$.If the one-year interest rate in the United States is 5% and in India is 8%,what is the spot exchange rate so as to preclude arbitrage?

Accepted Answer

The answer of The one-year forward exchange rate is Rupees...

Question 17

Assuming Covered Interest Parity holds,a(n)________ in the domestic interest rate will ________ the forward rate,all other things held constant.

Accepted Answer

Covered interest parity states that the forward exchange rate should be equal to the current spot exchange rate adjusted for the interest rate differential between two countries. If the domestic interest rate increases, according to the formula, the forward exchange rate should decrease to maintain the Covered Interest Parity. Therefore, an increase in the domestic interest rate will lead to a decrease in the forward rate.

Question 18

IBM enters into a forward contract to purchase 200,000 euros at a rate of $1.50/euro one year from today.If the spot exchange rate is $2/euro one year later,what is the dollar amount that IBM must pay to receive the euros.

Accepted Answer

According to the forward contract, IBM agrees to purchase 200,000 euros at a rate of $1.50/euro, one year from today. Therefore, the total cost to IBM would be:

200,000 euros x $1.50/euro = $300,000

However, at the time of settlement (one year later), the spot rate has changed to $2/euro. Therefore, if IBM were to purchase the euros at the spot rate, the cost would be:

200,000 euros x $2/euro = $400,000

Since IBM has already entered into a forward contract at a lower rate, they can purchase the euros at the agreed-upon rate of $1.50/euro, saving them money.

Thus, the dollar amount that IBM must pay to receive the euros is $300,000. Therefore, the correct answer is option D.

Question 19

________ asserts that because a forward contract and a cash-and-carry strategy accomplish the same conversion,they must result in the same exchange rate.

Accepted Answer

Covered interest parity states that the difference between interest rates in two countries should be equal to the forward premium or discount between their currencies. Since a cash-and-carry strategy involves borrowing in a low-interest rate country and investing in a high-interest rate country, it is equivalent to entering into a forward contract to buy the high-interest rate currency. Therefore, covered interest parity implies that both strategies should result in the same exchange rate, and any deviation from this would be the forward discount or premium puzzle.

Question 20

The importer-exporter dilemma is caused by:

Accepted Answer

The importer-exporter dilemma is caused by fluctuating exchange rates. When the exchange rate between two countries fluctuates, it can make it difficult for importers and exporters to predict their costs and revenue. If the exchange rate shifts unfavorably, it can lead to reduced profits or even losses. Therefore, this dilemma arises due to fluctuating exchange rates.

Quiz 23: International Corporate Finance

A firm wants to hedge a potential transaction but is also concerned about a possibility that it may not take place.In this case it is better to hedge potential risks using

A ________ strategy replicates the forward contract by borrowing in one currency,converting to the other currency and investing in the new currency.

The one-year forward exchange rate is Rupees 50/$.If the one-year interest rate in the United States is 5% and in India is 8%,what is the spot exchange rate so as to preclude arbitrage?

IBM enters into a forward contract to purchase 200,000 euros at a rate of $1.90/euro one year from today.If the spot exchange rate is $2/euro one year later,what is the dollar amount that IBM must pay to receive the euros.

IBM enters into a forward contract to purchase 100,000 euros at a rate of $1.60/euro one year from today.If the spot exchange rate is $2/euro one year later,what is the dollar amount that IBM must pay to receive the euros.

A ________ exchange rate is the rate that a firm can tie in for a future transaction date.

________ give a firm an option but not an obligation to exchange currency at a given rate.

The spot exchange rate for the British pound is 0.6 pounds/dollar.The one-year interest rate in the United States is 5% and the one-year interest rate in Britain is 6%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?

Firms use forward foreign exchange contracts rather than a cash-and-carry strategy because

The spot exchange rate for the British pound is 0.65 pounds/dollar.The one-year interest rate in the United States is 5% and the one-year interest rate in Britain is 7%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?

The spot exchange rate for the British pound is 0.5 pounds/dollar.The one-year interest rate in the United States is 4% and the one-year interest rate in Britain is 5%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?

The one-year forward exchange rate is Rupees 40/$.If the one-year interest rate in the United States is 4% and in India is 7%,what is the spot exchange rate so as to preclude arbitrage?

If a firm hedges a future purchase of euros by purchasing a call option,the firm the potential cost but will benefit if the euro .

A ________ is written between a firm and a bank and it fixes the currency exchange rate for a transaction that will occur at a future date.

The one-year forward exchange rate is Rupees 45/$.If the one-year interest rate in the United States is 5% and in India is 8%,what is the spot exchange rate so as to preclude arbitrage?

Assuming Covered Interest Parity holds,a(n) in the domestic interest rate will the forward rate,all other things held constant.

IBM enters into a forward contract to purchase 200,000 euros at a rate of $1.50/euro one year from today.If the spot exchange rate is $2/euro one year later,what is the dollar amount that IBM must pay to receive the euros.

________ asserts that because a forward contract and a cash-and-carry strategy accomplish the same conversion,they must result in the same exchange rate.

The importer-exporter dilemma is caused by:

Quiz 23: International Corporate Finance

A firm wants to hedge a potential transaction but is also concerned about a possibility that it may not take place.In this case it is better to hedge potential risks using

A ________ strategy replicates the forward contract by borrowing in one currency,converting to the other currency and investing in the new currency.

The one-year forward exchange rate is Rupees 50/$.If the one-year interest rate in the United States is 5% and in India is 8%,what is the spot exchange rate so as to preclude arbitrage?

IBM enters into a forward contract to purchase 200,000 euros at a rate of $1.90/euro one year from today.If the spot exchange rate is $2/euro one year later,what is the dollar amount that IBM must pay to receive the euros.

IBM enters into a forward contract to purchase 100,000 euros at a rate of $1.60/euro one year from today.If the spot exchange rate is $2/euro one year later,what is the dollar amount that IBM must pay to receive the euros.

A ________ exchange rate is the rate that a firm can tie in for a future transaction date.

________ give a firm an option but not an obligation to exchange currency at a given rate.

The spot exchange rate for the British pound is 0.6 pounds/dollar.The one-year interest rate in the United States is 5% and the one-year interest rate in Britain is 6%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?

Firms use forward foreign exchange contracts rather than a cash-and-carry strategy because

The spot exchange rate for the British pound is 0.65 pounds/dollar.The one-year interest rate in the United States is 5% and the one-year interest rate in Britain is 7%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?

The spot exchange rate for the British pound is 0.5 pounds/dollar.The one-year interest rate in the United States is 4% and the one-year interest rate in Britain is 5%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?

The one-year forward exchange rate is Rupees 40/$.If the one-year interest rate in the United States is 4% and in India is 7%,what is the spot exchange rate so as to preclude arbitrage?

If a firm hedges a future purchase of euros by purchasing a call option,the firm ________ the potential cost but will benefit if the euro ________.

A ________ is written between a firm and a bank and it fixes the currency exchange rate for a transaction that will occur at a future date.

The one-year forward exchange rate is Rupees 45/$.If the one-year interest rate in the United States is 5% and in India is 8%,what is the spot exchange rate so as to preclude arbitrage?

Assuming Covered Interest Parity holds,a(n) ________ in the domestic interest rate will ________ the forward rate,all other things held constant.

IBM enters into a forward contract to purchase 200,000 euros at a rate of $1.50/euro one year from today.If the spot exchange rate is $2/euro one year later,what is the dollar amount that IBM must pay to receive the euros.

________ asserts that because a forward contract and a cash-and-carry strategy accomplish the same conversion,they must result in the same exchange rate.

The importer-exporter dilemma is caused by:

If a firm hedges a future purchase of euros by purchasing a call option,the firm the potential cost but will benefit if the euro .

Assuming Covered Interest Parity holds,a(n) in the domestic interest rate will the forward rate,all other things held constant.