Deck 24: Risk Management

Question 1

Which of the following would you expect to be nearly equal across countries?

A)Nominal interest rates
B)Real interest rates
C)Inflation rates
D)Forward premium

Answer 1

Real interest rates

Question 2

If the direct exchange rate between U.S.Dollars and pounds sterling is 1.50/1, how much should you be willing to pay to receive 350 pounds?

A)$175.00
B)$233.33
C)$367.50
D)$525.00

Answer 2

$525.00

Question 3

If the spot indirect exchange rate of Mexican Pesos for U.S.Dollars is 9.8/1 and the peso is trading at a forward premium of 3%, then a U.S.trader will receive:

A)More than 9.8 Pesos per Dollar in the future
B)Less than 9.8 Pesos per Dollar in the future
C)9.83 Pesos per Dollar in the future
D)10.09 Pesos per Dollar in the future

Answer 3

Less than 9.8 Pesos per Dollar in the future

Question 4

If exchange rates adjust to reflect inflation differentials across countries, then:

A)The law of one price will always hold
B)No one will use forward currency markets
C)Interest rates will be equal across countries
D)PPP is said to hold

Question 5

Suppose that: What rate do you think a Japanese bank would quote for buying or selling Swiss Francs?

A)81.01 Yen
B)83.01 Yen
C)85.01 Yen
D)87.01 Yen 1.5231 Swiss Francs per Dollar
123)380 Yen per Dollar
Since 123.380 Yen have the same value as 1.5231 Swiss Francs, each franc should be worth: 123.38/1.5231 = 81.01 Yen

Question 6

If the indirect exchange rate between French Francs and U.S.Dollars is 6.8/1, then the direct exchange rate between these currencies is:

A)$.1471/FFr
B)$/6.8FFr
C)FFr/$6.8
D)FFr/$.1471

Question 7

If the exchange rate of German marks/U.S.Dollars is 2.04/1, then:

A)It takes $2.04 to buy each mark
B)The mark is worth more than one U.S.Dollar
C)Each mark is worth approximately 49 cents
D)20 cents will purchase one mark

Question 8

Suppose that: If the 3-month interest rate on Dollars is 3.5% (effective annual rate), what do you think is the 3-month sterling (U.K.) interest rate?

A)1.07%
B)2.07%
C)3.07%
D)4.07% We can utilize the interest rate parity theorem:

Question 9

If prices in the U.S.rise less rapidly than in Canada, which of the following would be expected according to purchasing power parity?

A)The value of the Canadian Dollar will decline, relative to the U.S.Dollar
B)The value of the U.S.Dollar will decline, relative to the Canadian Dollar
C)Inflation will increase in Canada
D)The price of gold will decline

Question 10

Suppose that: If no other information is available, what will your guess about the spot rate in one year be?

A)1.5331
B)1.5372
C)1.5502
D)2.0000

Question 11

Suppose that: What is the annualized %age discount or premium of the Canadian Dollar on the U.S.Dollar?

A)1.10% premium
B)1.10% discount
C)2.20% premium
D)2.20% discount The Canadian Dollar is at a forward discount.It takes more Canadian Dollars to buy one U.S Dollar in the forward market than in the spot market.

Question 12

The international Fisher effect predicts that differences in nominal interest rates between countries reflect differences in:

A)Real rates of interest
B)Purchasing power parity
C)The standard of living
D)Expected inflation

Question 13

How many Dollars will it take for a U.S.citizen to purchase a Japanese product priced at 60,000 Yen if the indirect exchange rate is 104/1?

A)$577
B)$700
C)$5,769
D)$62,400

Question 14

Which of the following is correct if you have contracted to purchase 1,000 Swiss Francs three months forward at a rate of Sf1.6/$?

A)You pay approximately $625 today for the Francs
B)You pay $1,600 today for the Francs
C)You pay approximately $625 three months from now for the Francs
D)You pay $1,600 three months from now for the Francs

Question 15

If the spot exchange rate between marks and Dollars is DM1.5/$before the Dollar depreciates by 10%, how many Dollars will it now take a U.S.payer to remit an invoice of DM500?

A)$366.67
B)$370.37
C)$750.00
D)$825.00

Question 16

Suppose that:
What arbitrage gains can be achieved if the bank quotes a rate of 75Yen per Swiss Francs?

A)8%
B)9%
C)10%
D)11% Suppose that the exchange rate were *1075/Swiss franc.Then an investor could:

Question 17

The theory that goods in a foreign country should be priced approximately equal after currency translation to goods in a host country is referred to as the law of:

A)Exchange rates
B)Large numbers
C)Spot rates
D)One price

Question 18

The ratio of expected spot rate to current spot rate for $ $\le$ is 1.02 and the inflation rate in the U.S.is 5%.What is the approximate inflation rate in the United Kingdom?

A)1.3%
B)2.9%
C)4.1%
D)7.0%

Question 19

The main purpose in contracting to purchase foreign currency in the forward market is to:

A)Earn a premium (interest) on the exchange
B)Lock into a price now
C)Take advantage of future price reductions
D)Avoid the more expensive spot rates

Question 20

Predict the expected spot exchange rate between the Japanese Yen and U.S.Dollar, given that inflation in Japan, at 8%, is 4% higher than in the U.S.and that the current spot rate is *107/$.

A)(*102.72/$)
B)(*103.04/$)
C)(*111.12/$)
D)(*111.28/$)

Question 21

A firm intends to hedge against exchange loss, a large future payment that must be made in a foreign currency.Which of the following identifies the cost of such a hedge?

A)Difference between expected and current spot rates
B)Difference between expected and current forward rates
C)Difference between the forward premium and the forward discount
D)Difference between the forward rate and the expected future spot rate

Question 22

Buckingham Inc., a British corporation, owes Canuck Inc., a Canadian corporation, $1 million due in two months.How can Buckingham hedge the exchange risk?

A)Sell pounds in the spot market
B)Buy pounds in the forward market
C)Sell Dollars in the spot market
D)Buy Dollars in the forward market

Question 23

Consider the following spot exchange rates: $2.56/ $\le$ , *65.62/$, DM1.0/$, and L1,263/$.Which of the following seems to violate the law of one price if gold sells for $464 per ounce in the Canada? Dollars in the exchange rates are Canadian.

A)1 troy oz.gold = $\le$ 181,250
B)1 troy oz.gold = *1030,448
C)1 troy oz.gold = DM464
D)1 troy oz.gold = L550,500

Question 24

Which of the following is correct if the spot exchange rate on the pound sterling is $2.56 (Canadian)/ $\le$ and the one-year forward exchange rate is $2.48 (Canadian)/ $\le$ ? The pound is trading:

A)At a 3.13% forward discount relative to the Dollar
B)At a 3.13% forward premium relative to the Dollar
C)At a 3.22% forward discount relative to the Dollar
D)At a 3.22% forward premium relative to the Dollar

Question 25

An indirect exchange rate can be converted to a direct exchange rate by:

A)Dividing the indirect rate by number of U.S.Dollars required to purchase one unit of the other currency
B)Dividing the indirect rate by 100
C)Multiplying the indirect rate by the spot rate
D)Taking the inverse of the indirect rate

Question 26

Arbitrageurs are said to look for riskless profits by:

A)Contracting in the forward exchange markets
B)Buying at the spot rate and selling at the forward rate
C)Buying in one market and selling in another to take advantage of different prices for the same good
D)Buying short-term bonds and converting them to long-term bonds

Question 27

Yesterday the spot exchange rate of Yen-to-Canadian Dollar was 65.What is today's spot exchange rate if the Yen has appreciated ten% against the Dollar today?

A)(*58.50/$)
B)(*60/$1.10)
C)(*65/$)
D)(*75/$1.10)

Question 28

U.S.investments with a one-year maturity can be made for 6% and Swiss one-year investments can be made for 3%.If the spot exchange rate is Sf1.6/$, which of the following one-year forward exchange rates would convince you to invest in Switzerland?

A)Sf1.55/$
B)Sf1.60/$
C)Sf1.65/$
D)Sf1.70/$ Difference in interest rates = Difference between forward and spot rates

Question 29

That Italian antique was priced at 3 million lire that, fortunately, does not have to be paid for three months.The lira has a spot exchange rate of L2,000/$(U.S.) but is trading three months forward at a 5% discount.If you contract ahead now, how many U.S.Dollars will the antique cost?

A)$1,425
B)$1,429
C)$1,575
D)$1,579 forward discount =

Question 30

Which of the following is correct when foreign currency is contracted in the forward market?

A)A fixed amount is paid when initiating the contract
B)A fixed amount is paid at the end of the contract
C)The amount to be paid is determined and paid at the end of the contract
D)The amount to be paid is determined periodically and paid in installments during the contract

Question 31

Which of the following is correct when contracting ahead in the forward exchange market?

A)At contract close you pay either the forward rate that was contracted or the then-current rate
B)Contracting ahead is always cheaper than waiting to pay spot rates
C)Your cost is locked-in from the beginning of the contract, regardless of market changes
D)Paying spot price is safer than contracting forward

Question 32

According to the expectations theory of exchange rates, what change is expected in the future spot exchange rate if the current spot rate is 8% lower than the forward exchange rate?

A)Future spot rate is expected to increase by 8%
B)Future spot rate is expected to decrease by 8%
C)Future spot rate is expected to decrease by 4%
D)No change is expected in the future spot rate Difference between forward and spot rates = Expected change in spot rates

Question 33

What do you expect to happen to prices in Japan, given nominal interest rates of 10% in Canada and 6% in Japan, and expected Canadian inflation of 6%?

A)Expected Japanese inflation is 1.79%
B)Expected Japanese inflation is 2.11%
C)Expected Japanese inflation is 6.22%
D)Expected Japanese inflation is 10.00%

Question 34

If interest rates are higher in Italy than in Canada, the market expects that the lira will:

A)Appreciate against the Dollar
B)Depreciate against the Dollar
C)Offer a higher real rate of return than the Dollar
D)Be selling at a forward discount

Question 35

A foreign manufacturer must make a $2 million payment to its Canadian supplier in 60 days.Which of the following is correct?

A)The firm hopes that the Canadian Dollar appreciates within the 60 days
B)The firm's exchange rate risk is hedged
C)The firm faces contractual exchange rate risk
D)The current spot exchange rate is likely to be trading at a premium

Question 36

How much would you expect to receive for a nominal interest rate in Holland if funds can be invested in the U.S.at a rate of 7% when inflation is expected to be 4% in the U.S.and 8% in Holland?

A)5.19%
B)7.93%
C)9.08%
D)11.11%

Question 37

If you buy Yen forward when the Yen is selling at a forward premium, you will get:

A)More Yen than if you buy on spot market
B)Fewer Yen than if you buy on spot market
C)The same number of Yen as on the spot market, but with a lower commission
D)The expectation of more Yen, but the difference is not locked in

Question 38

If the difference between forward and spot exchange rates is positive, interest rate parity would predict that:

A)The difference in interest rates between countries will be negative
B)The difference in interest rates between countries will be positive
C)There will be no difference in interest rates between countries
D)The difference will be quickly eliminated

Question 39

How much wealthier would you be one year from now if you exchange $100,000 (U.S.) into Hong Kong Dollars today at an indirect rate of HK$7.8/$, earn 7% on your Hong Kong investment, and exchange back at a rate of HK$8.0/$, as compared to investing in the U.S.at 4.0%?

A)$(2,600)
B)$325
C)$2,000
D)$5,744 $100,000 x 7.8 = HK$780,000
HK$780,000 x 1.07 = HK$834,600
HK$834,600/8.0 = $104,325
Compared to: $100,000 x 1.04 = $104,000,

Question 40

What can be said about the spot exchange rate of Dollars for pounds if nominal interest rates are higher in Canada than in Great Britain?

A)It should exceed the forward rate of Dollars for pounds
B)It should be less than the forward rate of Dollars for pounds
C)It is expected to increase
D)It is expected to remain constant

Question 41

What is the expected spot rate of */$(Canadian) one year from now if the current spot rate is *66/$and the Yen is selling one-year forward at *70/$?

A)(*78.9/$)
B)(*98.0/$)
C)(*66/$)
D)(*70/$)

Question 42

Which of the following appears to be a safe assumption when there is no difference between the forward and spot exchange rates between two currencies?

A)The countries have equal nominal interest rates
B)The spot rate is expected to change
C)Expected inflation is less than the nominal rate
D)Both currencies are selling at a premium relative to the other

Question 43

The six-month forward quote for German mark is DM1.6/US$, and the spot price of German mark is DM1.7/US$.Which of the following statements is true?

A)Forward discount on German mark is 6.25%
B)Forward premium on German mark is 6.25%
C)Forward discount on US$ is 6.25%
D)Forward premium on US$ is 6.25% forward premium =

Question 44

Where would you prefer to invest, and why, if nominal rates are 10% in Canada and 25% in Holland, while the expected rates of inflation are 5% and 19% respectively? Assume investments of equal risk.

A)Invest in Holland due to higher nominal rate
B)Invest in Canada; real return is 1.1% higher
C)Invest in Canada; real return is 0.1% higher
D)Invest in Holland; real return is 0.24% higher r_$(real) =

Question 45

What is the expected German inflation rate if 3% inflation is expected in the United States, the spot exchange rate is DM1.5/$and the expected spot rate is DM1.6/$?

A)2.81%
B)7.10%
C)9.87%
D)11.43%

Question 46

The French franc is currently worth $0.24 and it's selling in the one-year forward market at a 10% premium relative to the Canadian Dollar.Approximately what rate would you expect to pay for a one-year loan in France if the rate would be 10% in Canada?

A)10.00%
B)11.62%
C)14.55%
D)20.00% 1.1 x 4.167 = 4.583

Question 47

One of the drawbacks of using forward contracts to hedge foreign-exchange risk is that the:

A)Transaction costs in the forward market are high
B)Forward rates are always lower than spot rates
C)Hedged currency could appreciate during the period
D)Hedged currency could depreciate during the period

Question 48

On average, empirical evidence suggests that those who cover foreign exchange commitments in the forward market pay a premium of approximately _____ to avoid exchange-rate risk.

A)0.0%
B)3.1%
C)5.0%
D)7.3%

Question 49

You have decided to hedge your exchange-rate risk in your U.S.-based firm by contracting forward to buy 500,000 Swiss Francs for delivery in one year.The current exchange rate is Sf1.6/$.The forward rate is Sf1.7/$(U.S.).How much better (worse) off are you if you don't buy the forward contract and instead pay the spot rate in one year if it turns out to be Sf1.65/$?

A)($14,245)
B)($8,912)
C)$8,912
D)$27,472 current Dollar commitment =

Question 50

What would you expect to be the relationship between real rates of interest in Japan and Canada if inflation is expected to be 3% in Japan and 6% in Canada?

A)Japan's real interest rate should be 3% higher than in Canada
B)Japan's real interest rate should be 3% lower than in Canada
C)Japan's real interest rate should be half as high as in Canada
D)Real interest rates should be equal in both countries

Question 51

If managers intend to adjust the projections of foreign investments, it is probably better to make the adjustments in:

A)The discount rate used
B)The cash flows projected
C)Both the discount rate and cash flows
D)Exchange rate, but never in the discount rate

Question 52

You are hoarse from explaining to your supervisor that the cost, if any, of hedging exchange-rate risk can be thought of as an insurance premium to avoid surprises.What is the cost of hedging a DM2 million commitment if the spot rate is DM1.6/$, the forward rate is DM1.55/$, and the expected spot rate at the end of the hedge is DM1.6/$?

A)$0
B)$25,000
C)$40,323
D)$68,966 current Dollar commitment =

Question 53

Which of the following would you expect to improve the Dollar-NPV of a foreign capital budgeting proposal?

A)The Dollar is expected to appreciate against the foreign currency
B)Lower inflation is expected in the foreign country than in the United States
C)The foreign country has a less stable political environment
D)The risk-free rate in the foreign country is higher than in the United States

Question 54

Which of the following illustrates non-contractual exchange-rate risk?

A)A Canadian importer will owe $\le$ 50,000 and the pound is expected to appreciate
B)A French airplane manufacturer has suppliers in Canada and the exchange rate has been unstable
C)A Canadian distributor of Japanese electronic goods expects the Dollar to depreciate
D)A Canadian subsidiary of a German manufacturer transfers DM100,000 to the parent annually

Question 55

You have the opportunity to invest in the United States at 6% or invest in an equally risky Australian investment that offers 20%.This is too good to be true! The current exchange rate is A$1.65/$.Which of the following do you suspect about this one-year investment?

A)Expected inflation is higher in the United States
B)The one-year forward exchange rate is A$1.8679/$
C)Real interest rates are higher in the United States
D)The Australian Dollar is selling forward at an 8.48% premium relative to the U.S.Dollar

Question 56

Your firm, which operates in the United States, has a contractual payment of $\le$ 1 million due in three months.Which of the following methods would be considered speculative regarding your exchange-rate risk?

A)Buy 1 million pounds now at the current spot rate
B)Buy 1 million pounds in three months at the current spot rate
C)Contract forward to buy 1 million pounds in three months
D)Borrow Dollars, convert to pounds at spot, invest for three months

Question 57

If the correlation of returns between foreign projects and domestic projects is less than 1.0, then:

A)Foreign projects should be discounted with a higher rate
B)The domestic firm would be better off without the foreign projects
C)The foreign project may not add much risk to the existing domestic operation
D)The foreign projects will experience a higher degree of inflation

Question 58

According to the theory of purchasing power parity, exchange rates will adjust so that differences in:

A)Interest rates across countries are offset
B)Forward rates across countries are offset
C)Expected inflation across countries is offset
D)International Fisher rates are offset

Question 59

What would you expect to occur if the rate of expected inflation in Canada is considerably lower than expected inflation in Germany?

A)The expected spot rate of DM/$will increase
B)The current spot rate of DM/$will increase
C)The Dollar should appreciate against the mark
D)The Dollar should depreciate against the mark

Question 60

If the direct quote for French franc(FF) is $0.22/$(Canadian), then the indirect quote for French franc will be:

A)3.55FF/$
B)1.22FF/$
C).044FF/$
D)4.55FF/$

Question 61

The current one-year nominal interest in Canada is 7%.If the anticipated inflation for the coming year in Canada is 2.5%, what is the real interest rate?

A)4.21%
B)4.39%
C)4.50%
D)7.18% real interest =

Question 62

The Yen is currently trading at *109.66 per USD, while the forward rate is *112.96 per USD.Given this information, calculate the forward premium or discount.

A)5.92% premium
B)2.92% premium
C)5.92% discount
D)2.92% discount

Question 63

You can value overseas investments using the NPV of the cash flows.Which of the following adjustment is necessary to calculate the NPV?

A)Convert the opportunity cost of capital and cash flows into foreign currency
B)Convert the foreign cash flows into domestic currency and use the domestic opportunity cost of capital for discounting
C)Use domestic discount rate to discount foreign cash flows
D)Convert the foreign cash flow into domestic currency and use the foreign cost of capital for discounting

Question 64

Which of the following statements is correct?

A)A currency with higher interest rate will sell at a forward discount
B)A currency with higher interest rate will sell at a forward premium
C)A currency with higher interest rate will have a higher spot rate
D)A currency with higher interest rates will have a lower spot rate

Question 65

If Purchasing Power Parity is holding, what will happen to the currency of a country with high inflation?

A)Currency will appreciate
B)Currency will depreciate
C)No significant change in exchange rate
D)Currency will sell at a forward premium

Question 66

The spot exchange rate of British Pound( $\le$ ) is $2.56(Canadian)/ $\le$ .The annual inflation rate in Canadian $is 4% and 8% in Britain.What will be the anticipated exchange rate at the end of the year if PPP is valid?

A)$2.4652/ $\le$
B)$2.1503/ $\le$
C)$3.0804/ $\le$
D)$2.5600/ $\le$ E(exchange rate) = spot rate x

Question 67

The direct exchange rate quotes the number of Canadian Dollars required to buy one unit of a foreign currency.

Question 68

The Yen is currently trading at *105.89 per USD, while the forward rate is *102.33 per USD.Given this information, calculate the forward premium.

A)3.48%
B)5.48%
C)7.48%
D)9.48%

Question 69

The international Fisher effect is valid in the long run, because:

A)Inflation rates are equal in different countries
B)Investors will move their money into countries with high real interest rates
C)Investors will move their money into countries with high nominal interest rates
D)Investors will move their money into countries with low inflation

Question 70

Current one-year interest rates are 4% and 8% in Canada and Spain respectively.The anticipated inflation in Canada is 2%.If international Fisher effect holds, what is the expected inflation in Spain?

A)4.00%
B)4.04%
C)5.92%
D)6.00% real interest (Canadian) =

Question 71

The following information is provided to you: What is the one-year interest rate for Swiss franc?

A)2.00%
B)1.67%
C)1.50%
D)1.33% forward rate = spot rate x

Question 72

The Toronto Stock Exchange is one of few markets to have a higher daily volume than the foreign exchange market.

Question 73

Countries with high inflation will have the:

A)Weakest currency
B)Highest nominal interest rate
C)Strongest currency
D)Highest real interest rate

Question 74

If you are a currency speculator, you will always make money by:

A)Buying currency with high interest rate
B)Buying currency with low interest rate
C)Accurately predicting whether exchange rate will change more or less than the interest rate differential
D)Buying the currency with the highest interest rate differential

Question 75

The Japanese Yen exchange rate is *115 = $1, while the British Pound exchange rate is $\le$ 1 = $2.05.Given this information, calculate the cross-rate in terms of Yen per pound.

A)(*235.75 per $\le$ 1)
B)(*275.35 per $\le$ 1)
C)(*56.10 per $\le$ 1)
D)(*51.60 per $\le$ 1)

Question 76

High inflation rates are usually associated with:

A)Low nominal interest rates
B)High nominal interest rates
C)High real interest rates
D)Low real interest rates

Question 77

Assuming that the international Fisher effect is holding, what will be the effect of an increase in nominal interest rate on the currency?

A)Currency will appreciate
B)Currency will depreciate
C)No significant change in exchange rate
D)Currency will sell at a forward premium

Question 78

During the 1980s, the Japanese Yen appreciated against the U.S.Dollar.As a result of this, the Japanese products became less price competitive in the U.S.This is an example of:

A)Contractual risk
B)Non-contractual risk
C)Exchange rate risk
D)Forward premium

Question 79

You are importing TV sets worth *10,000,000 from a Japanese manufacturer, and this amount is payable after six months.You can hedge your exchange risk by doing one of the following.

A)Buying Japanese Yen in the forward market
B)Selling Japanese Yen in the forward market
C)Borrowing Japanese Yen
D)Do nothing

Question 80

The spot exchange rate for Canadian Dollar(C$) is U.S.$0.68/C$.The six-month interest rate in U.S.is 2.5% and 3.0% in Canada.What is the six-month forward rate for Canadian Dollar?

A)U.S.$0.6734/C$
B)U.S.$0.6767/C$
C)U.S.$0.6833/C$
D)U.S.$0.6866/C$ forward rate = spot rate x