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What is the annualized forward premium

Question 1. Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid ask percentage spread is:

a) 4.44%.

b) 4.26%.

c) 4.03%.

d) 4.17%.

Question 2. 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) 0.3621 Canadian dollars.

b) 0.3977 Canadian dollars.

c) 2.36 Canadian dollars.

d) 2.51 Canadian dollars

Question 3. The ADR of a British firm is convertible into 3 shares of stock. The share price of the firm was 30 pounds when the British market closed. When the U.S. market opens, the pound is worth $1.63. The price of this ADR should be $_______.

a) 48.90

b) 146.70

c) 55.21

d) none of the above

Question 4. 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

Question 5. The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro?

a) 1.9 percent discount.

b) 1.9 percent premium.

c) 7.6 percent premium.

d) 7.6 percent discount.

Question 6. You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is:

a) $.08

b) $.03

c) $.05

d) $.08

e) none of the above

Question 7. Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $.02. If the spot rate at the option's maturity turns out to be $1.54, what is Carl's profit or loss per unit (assuming the buyer of the option acts rationally)?

a) -$0.01

b) $0.01

c) -$0.04

d) $0.04

e) -$0.03

Question 8. Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. The forward rate exhibits a _______ of _______.

a) premium; about 6%

b) discount; about 6%

c) discount; about 6.45%

d) premium; about 6.45%

Question 9. Assume the following information:

U.S. investors have $1,000,000 to invest

1-year deposit rate offered on U.S. dollars = 12%

1-year deposit rate offered on Singapore dollars = 10%

1-year forward rate of Singapore dollars = $.412

Spot rate of Singapore dollar = $.400

Given this information:

a) interest rate parity exists and covered interest arbit¬rage by U.S investors results in the same yield as investing domestically.

b) interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

c)interest rate parity exists and covered interest arbit¬rage by U.S. investors results in a yield above what is possible domesti¬cally.

d) interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

Question 10. Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

a) $15,385.

b) $15,625.

c) $22,136.

d) $31,250.

Question 11. Assume the bid rate of a Singapore dollar is $.40 while the ask rate is $.41 at Bank X. Assume the bid rate of a Singapore dollar is $.42 while the ask rate is $.425 at Bank Z. Given this information, what would be your gain if you use $1,000,000 and execute loca¬tional arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

a) $11,764.

b) $11,964.

c) $36,585.

d) $24,390.

e) $18,219.

Question 12. Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the value of the Canadian dollar in pounds?

a) 2.00

b) 2.40

c) .80

d) .50

e) none of the above

Question 13. According to the international Fisher effect, if U.S. investors expect a 5% rate of domestic inflation over one year, and a 2% rate of inflation in European countries that use the euro, and require a 3% real return on invest¬ments over one year, the nominal interest rate on one year U.S. Treasury securities would be:

a) 9%.

b) 3%.

c) 2%.

d) 5%.

e) 8%.

Question 14. Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect, the franc will _______ by about _______.

a) appreciate; 3%

b) appreciate; 1%

c) depreciate; 3%

d) appreciate; 2%

Question 15. The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 1.3%. The current exchange rate for the Japanese yen (¥) is $0.0075. After supply and demand for the Japanese yen has adjusted in the manner suggested by purchasing power parity, the new exchange rate for the yen will be:

a) $0.0076

b) $0.0075

c) $0.0074

d) $0.0131

e) none of the above

Question 16.You have an opportunity to invest in Australia at an interest rate of 8%. Moreover, you expect the Australian dollar (A$) to appreciate by 2%. Your effective return from this investment is:

a) 8.00%.

b) 6.00%.

c) 10.16%.

d) 5.88%.

Question 17. If nominal British interest rates are 3% and nominal U.S. interest rates are 6%, then the British pound (£) is expected to ____________ by about _________%, according to the international Fisher effect (IFE).

a) depreciate; 2.9

b) appreciate; 2.9

c) depreciate; 1.0

d) appreciate; 1.0

Question 18. Silicon Co. has forecasted the Canadian dollar for the most recent period to be $0.73. The realized value of the Canadian dollar in the most recent period was $0.80. Thus, the absolute forecast error as a percentage of the realized value was ______%.

a) 9.6

b) -9.6

c) 8.8

d) -8.8

Question 19. Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6% discount. Today's spot rate of the Canadian dollar is $.80. The spot rate forecasted for one year ahead is:

a) $.860

b) $.848

c) $.740

d) $.752

e) none of the above

Question 20. Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in Greece. Both subsidiaries frequently remit their earnings back to the parent company. The German subsidiary generated a net outflow of ?2,000,000 this year, while the Greek subsidiary generated a net inflow of ?1,500,000. What is the net inflow or outflow as measured in U.S. dollars this year? The exchange rate for the euro is $1.05.

a) $3,675,000 outflow

b) $525,000 outflow

c) $525,000 inflow

d) $210,000 outflow

Question 21. Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 95% confidence level, what is the maximum one-day loss in dollars if the expected percentage change of the euro tomorrow is 0.5%? The current spot rate of the euro (before considering the maximum one-day loss) is $1.01.

a) -$ 75,750

b) -$ 60,600

c) -$111,100

d) -$ 25,250

Question 22. Volusia, Inc. is a U.S.-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 dollar 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. Assuming an expected percentage change of 0 percent for each currency during the next month, what is the maximum one-month loss of the currency portfolio? Use a 95 percent confidence level and assume the monthly percentage changes for each currency are normally distributed.

a) -9.00%.

b) -30.00%.

c) -5.00%.

d) none of the above

Question 23. Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option:

Exercise price = $.61

Premium = $.02

Spot rate = $.60

Expected spot rate in 30 days = $.56

30 day forward rate = $.62

a) $630,000

b) $610,000

c) $600,000

d) $590,000

e) $580,000

Question 24. The forward rate of the Swiss franc is $.50. The spot rate of the Swiss franc is $.48. The following interest rates exist:

U.S. Switzerland

360 day borrowing rate 7% 5%

360 day deposit rate 6% 4%

You need to purchase SF200,000 in 360 days. If you use a money market hedge, the amount of dollars you need in 360 days is:

a) $101,904

b) $101,923

c) $ 98,770

d) $ 96,914

e) $ 92,307.

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## Q : Decision of utilizing spot versus forward exchange rates

What are the factors that affect your decision of utilizing spot versus forward exchange rates?