121. Which of the following examples definitely illustrates a depreciation of the U.S. dollar?
A. The dollar exchanges for 1 pound and then exchanges for 1.2 pounds.
B. The dollar exchanges for 250 yen and then exchanges for 275 francs.
C. The dollar exchanges for 100 francs and then exchanges for 120 yen.
D. The dollar exchanges for 120 francs and then exchanges for 100 francs
Answer
D. The dollar exchanges for 120 francs and then exchanges for 100 francs
122. If U.S. inflation suddenly increased while European inflation stayed the same, there wouldbe:
A. an increased U.S. demand for Euros and an increased supply of Euros for sale.
B. a decreased U.S. demand for Euros and an increased supply of Euros for sale.
C. a decreased U.S. demand for Euros and a decreased supply of Euros for sale.
D. an increased U.S. demand for Euros and a decreased supply of Euros for sale.
Answer
D. an increased U.S. demand for Euros and a decreased supply of Euros for sale.
123. Under a fixed exchange rate system:
A. central bank intervention in the foreign exchange market is often necessary;
B. central bank intervention in the foreign exchange market is not necessary since rates do not move;
C. central bank intervention in the foreign exchange market is not permitt
Answer
A. central bank intervention in the foreign exchange market is often necessary;
124. Given a home country and a foreign country, purchasing power parity suggests that:
A. the home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate;
B. the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.
C. the home currency will depreciate if the current home interest rate exceeds the current foreign interest rate;
D. the home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate;
Answer
B. the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.
125. By definition, currency appreciation occurs when
A. the value of all currencies fall relative to gold.
B. the value of all currencies rise relative to gold.
C. the value of one currency rises relative to another currency.
D. the value of one currency falls relative to another currency.
Answer
C. the value of one currency rises relative to another currency.
126. If purchasing power parity were to hold even in the short run, then:
A. quoted nominal exchange rates should be stable over time.
B. real exchange rates should tend to increase over time;
C. real exchange rates should tend to decrease over time;
D. real exchange rates should be stable over time;
Answer
D. real exchange rates should be stable over time;
127. The international Fisher effect suggests that should pound interest rates exceed US dollarinterest rates:
A. the pound’s value will remain constant;
B. the pound will be at a discount on the dollar;
C. UK inflation rate will decrease.
D. the pound will depreciate against the dollar;
Answer
D. the pound will depreciate against the dollar;
128. Kalons ltd. is a UK-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances?
A. purchase Canadian dollars forward.
B. purchase Canadian dollar futures contracts.
C. purchase Canadian dollar put options.
D. purchase Canadian dollar call options.
Answer
C. purchase Canadian dollar put options.
129. Which of the following is the most likely strategy for a UK firm that will be receiving Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?
A. purchase a call option on francs.
B. sell a futures contract on francs.
C. obtain a forward contract to purchase francs forwa
Answer
B. sell a futures contract on francs.
130. 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
Answer
D. none of the above
131. European currency options can be exercised ___ ; American currency options canbe exercised ___
A. any time up to the expiration date; any time up to the expiration date
B. any time up to the expiration date; only on the expiration date
C. only on the expiration date; only on the expiration date
D. only on the expiration date; any time up to the expiration date
Answer
D. only on the expiration date; any time up to the expiration date
132. A UK corporation has purchased currency call options to hedge a 70,000 dollar payable. The premium is £0.015 and the exercise price of the option is £0.54. If the spot rate at the time of maturity is £0.59, what is the total amount paid by the corporation if it acts rationally?
A. £36,750
B. £1,050
C. £37,800
D. £38,850
Answer
D. £38,850
133. Conditional currency options are:
A. options that do not require premiums.
B. options where the premiums are canceled if a trigger level is reached.
C. options that allow the buyer to decide what currency the option will be settled in.
D. none of the above
Answer
B. options where the premiums are canceled if a trigger level is reached.
134. Which of the following are true regarding the options markets?
A. Hedgers and speculators both attempt to lower risk.
B. Hedgers attempt to lower risk, while speculators attempt to make riskless profits.
C. Hedgers and speculators are both necessary in order for the market to be liqu
Answer
C. Hedgers and speculators are both necessary in order for the market to be liqu
135. The premium of a currency put option will increase if:
A. the volatility of the underlying asset goes up.
B. the time to maturity goes up.
C. the spot rate declines.
D. none of the above
Answer
D. none of the above
136. Which of the following is true of options?
A. The writer decides whether the option will be exercised.
B. The writer pays the buyer the option premium.
C. The buyer decides if the option will be exercis
Answer
C. The buyer decides if the option will be exercis
137. The purchase of a currency put option would be appropriate for which of the following?
A. Investors who expect to buy a foreign bond in one month.
B. Corporations who expect to buy foreign currency to finance foreign subsidiaries.
C. Corporations who expect to collect on a foreign account receivable in one month.
D. All of the above
Answer
B. Corporations who expect to buy foreign currency to finance foreign subsidiaries.
138. The spot rate for the Singapore dollar is £0.320. The 30-day forward rate is £0.325.The forward rate contains an annualized ___ of ___ %.
A. discount; -18.75
B. premium; 18.75
C. discount; -18.46
D. premium; 18.46
Answer
B. premium; 18.75
139. Translation exposure reflects:
A. the exposure of a firm’s ongoing international transactions to exchange rate fluctuations.
B. the exposure of a firm’s local currency value to transactions between foreign exchange traders.
C. the exposure of a firm’s financial statements to exchange rate fluctuations.
D. the exposure of a firm’s cash flows to exchange rate fluctuations.
Answer
C. the exposure of a firm’s financial statements to exchange rate fluctuations.
140. Diz ltd. is a UK-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta ltd is a UK-based MNC that has the same level of net cash flows in these currencies as Diz ltd except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?
A. Diz ltd
B. Yanta ltd
C. the firms have about the same level of exposure.
D. neither firm has any exposure.
Answer
A. Diz ltd
141. Which of the following operations benefits from depreciation of the firm’s local currency?
A. borrowing in a foreign country and converting the funds to the local currency prior to the depreciation.
B. purchasing foreign supplies.
C. investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency.
D. A and B
Answer
C. investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency.
142. Magent ltd. is a UK company that has exposure to the Swiss franc (SF) and Danish kroner (DK). It has net inflows of SF 200 million and net outflows of DK 500 million. The present exchange rate of the SF is about £0.22 while the present exchange rate of the DK is £0.05. Magent ltd. has not hedged these positions. The SF and DK are highly correlated in their movements against the pound. If the pound weakens, then Magent ltd. will:
A. benefit, because the pound value of its SF position exceeds the pound value of its DK position.
B. benefit, because the pound value of its DK position exceeds the pound value of its SF position.
C. be adversely affected, because the pound value of its SF position exceeds the pound value of its DK position.
D. be adversely affected, because the pound value of its DK position exceeds the pound value of its SF position.
Answer
A. benefit, because the pound value of its SF position exceeds the pound value of its DK position.
143. Subsidiary A of Mega plc has net inflows in Australian dollars of A$1,000,000, while Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is £0.30. What is the net inflow or outflow as measured in pounds?
A. £150,000 outflow
B. £150,000 inflow
C. £1,666,000 inflow
D. £1,666,000 outflow
Answer
A. £150,000 outflow
144. If an MNC expects cash inflows of equal amounts in two currencies, and the two currencies are ___ correlated, the MNC’s transaction exposure is relatively ___
A. negatively; high
B. negatively; low
C. positively; low
D. none of the above
Answer
B. negatively; low
145. The maximum one-day loss computed for the value-at-risk (VAR) method, does not depend on:
A. the expected percentage change in the currency for the next day.
B. the standard deviation of the daily percentage changes in the currency over a previous period.
C. the current level of interest rates.
D. the confidence level used.
Answer
C. the current level of interest rates.
146. Volusia, plc is a UK-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today’s spot rates, the pound value of the funds to be received is estimated at £500,000 for the euros and £300,000 for the Canadian dollars. Based on data for the last fifty months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30. What is the portfolio standard deviation?
A. 3.00%.
B. 5.44%.
C. 17.98%.
D. none of the above
Answer
B. 5.44%.
147. The ___ the percentage of an MNC’s business conducted by its foreign subsidiaries, the ___ the percentage of a given financial statement item that is susceptible to translation exposure.
A. greater; smaller
B. smaller; greater
C. greater; greater
D. none of the above
Answer
C. greater; greater
148. Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP). 25% of the MNC’s funds are Taiwan dollars and 75% are pounds. The standard deviation of exchange movements is 7% for Taiwan dollars and 5% forpounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is. 7. Based on this information, the standard deviation of this two-currency portfolio is approximately:
A. 5.13%.
B. 2.63%.
C. 4.33%.
D. 5.55%
Answer
A. 5.13%.
149. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be:
A. positive.
B. negative.
C. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
D. zero.
Answer
D. zero.
150. An example of cross-hedging is:
A. find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency.
B. use the forward market to sell forward whatever currencies you will receive.
C. use the forward market to buy forward whatever currencies you will receive.
D. B and C
Answer
A. find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency.
151. The real cost of hedging payables with a forward contract equals:
A. the nominal cost of hedging minus the nominal cost of not hedging.
B. the nominal cost of not hedging minus the nominal cost of hedging.
C. the nominal cost of hedging divided by the nominal cost of not hedging.
D. the nominal cost of not hedging divided by the nominal cost of hedging.
Answer
A. the nominal cost of hedging minus the nominal cost of not hedging.
152. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:
A. sell euros forward.
B. write euro currency put options.
C. purchase euro currency call options.
D. purchase euros forward.
Answer
A. sell euros forward.
153. A ___ involves an exchange of currencies between two parties, with a promise tore-exchange currencies at a specified exchange rate and future date.
A. long-term forward contract
B. currency swap
C. parallel loan
D. money market hedge
Answer
C. parallel loan
154. Assume that Parker Company will receive SF 200,000 in 360 days. Assume the following interest rates: UK Switzerland 360-day borrowing rate 7% 5% 360-day deposit rate 6% 4% Assume the forward rate of the Swiss franc is £0.44 and the spot rate of the Swiss franc is £0.42. If Parker Company uses a money market hedge, what equivalent amount could it receive in 360 days?
A. £101,904
B. £101,923
C. £88,769
D. £84,919
Answer
D. £84,919
155. Assume that Kramer Co. will receive SF 800,000 in 90 days. Today’s spot rate of the Swiss franc is £0.42, and the 90-day forward rate is £0.425. Kramer has developed the following probability distribution for the spot rate in 90 days: Possible Spot Rate in 90 Days Probability £0.41 10% £0.42 20% £0.43 40% £0.44 30% The probability that the forward hedge will result in more dollars received than not hedging is:
A. 10%.
B. 20%.
C. 30%.
D. 50%.
Answer
C. 30%.
156. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today’s spot rate of the NZ$ is £0.35, and the 180-day forward rate is £0.36. A call option on NZ$ exists, with an exercise price of £0.37, a premium of £0.01, and a 180- day expiration date. A put option on NZ$ exists with an exercise price of £0.36, a premium of £0.01, and a 180-day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days: Possible Spot Rate in 90 Days Probability £0.30 10% £0.35 60% £0.40 30% The probability that the forward hedge will result in more U.S. dollars received than the options hedge is ___ (deduct the amount paid for the premium when estimating the U.S. dollars received on the options hedge).
A. 10%
B. 30%
C. 40%
D. 70%
Answer
D. 70%
157. Which of the following is the least effective way of hedging transaction exposure in the long run?
A. long-term forward contract.
B. parallel loan.
C. currency swap.
D. money market hedge.
Answer
D. money market hedge.
158. In a forward hedge, if the forward rate is an accurate predictor of the future spot rate,the real cost of hedging payables will be:
A. highly positive.
B. zero.
C. highly negative.
D. none of the above
Answer
C. highly negative.
159. The potential effect of exchange rate fluctuations on foreign direct investment is expressedas ___ exposure.
A. translation
B. transaction
C. conversion
D. economic
Answer
D. economic
160. Which of the following is not one of the steps for currency exposure management:
A. forecast the degree of exposure
B. develop a reporting system to monitor exposure and exchange rate movements
C. buying additional foreign subsidiaries
D. assign responsibility for hedging exposure
Answer
C. buying additional foreign subsidiaries
