Expert Answers

A. Suppose the original exchange rate for British pounds was $1.50/£ and moved to $1.75 after a positive change in the forecast for the British economy. What was the rate of appreciation for the pound against the dollar?

a. 40.0%
b. 16.7%
c. 14.3%
d. 25.5%

B. In order to boost the value of the euro relative to the dollar

a the Fed should sell dollars for euro and the European
Central Bank should buy euro with dollars
b. the Fed should sell dollars for euro and the European
Central Bank should buy dollars with euro
c. the Fed should sell euro for dollars and the European
Central Bank should sell dollars for euro
d. the Fed should sell euro for dollars and the European
Central Bank should buy euro with dollars

C. The___________is an accounting statement that summarizes all the economic transactions between the home country and the rest of the world.

a. balance of payments
b. balance of trade
c. current account
d. capital account

D. The current account records

a. public and private investment and lending activities
b. flows of goods, services, and transfers
c. changes in holdings of gold and foreign currencies
d. reserve assets

E. Gifts and grants overseas are known as __________on the balance of payment statement.

a. imports
b. exports
c. unilateral transfers
d. capital accounts

2. Some estimates suggest that $550 billion in currency is held outside the United States.

a. What is the value of the seigniorage associated with these overseas dollars?
Assume that dollar interest rates are 7%.

b. Who realizes the benefits of this seigniorage in the United States?

3. Recently, a U.S. arbitrageur obtained the following quotes:

New York: $1.6895/£ 1
$1.1797/ Euro 1

Frankfurt: Euro 1.4629/£ 1

Are there any arbitrage opportunities? If so:

(a) What transactions should a U.S. arbitrageur undertake?

(b) What is the arbitrageur’s profit in dollars per dollar transacted?

4. a. The spot and 30-day forward rates for the Dutch guilder are $0.3075 and $0.3120, respectively. Compute the annual percentage forward premium or discount on the guilder.

b. If the expected annual inflation in the U.S. is 6% and for Mexico it is 80%, what do you expect the $ : peso exchange rate to be one year from now? Currently, one peso is selling for $0.005

c. Computer, U.S.A. wants to raise $20 million to build a plant in New Jersey. It can choose borrowing from the following alternatives at the following annual interest rates: US loan @ 10, euro loan @ 15%, yen loan@ 6%.

5. In the following, circle the correct answer and, where appropriate, show how you arrive at your solution.

i. The basic difference(s) between forward and future contracts is that

a. forward contracts are individually tailored while futures contracts are standardized
b. forward contracts are negotiated with banks whereas futures contracts are bought and sold on an organized exchange
c. forward contracts have no daily limits on price fluctuations whereas most futures contracts have a daily limit on price fluctuations
d. all of the above
e. none of the above

ii. Suppose you are holding a long position in a Swiss franc futures contract that matures in 76 days, the agreed-upon price is $0.850 for SF 125,000. At the close of trading today, the futures price has risen to $0.860. Under marking to market, you now

a. hold a futures contract that has risen in value by $1,250
b. hold a futures contract that has fallen in value by $625
c. will receive $1,250 and a new futures contract priced at
$0.860
d. must pay over $1,250 to the seller of the futures contract
e. none of the above

6. You should be aware of approximate foreign exchange and interest rates.
In the following table, fill in the appropriate foreign exchange rates and interest rates. Your response will be judged correct if it is within plus/minus 3% of the rates prevailing at the closing of the market on the Monday following the day the test was handed out.

Currency FX Rate Your Response

Canadian Dollar $/CD $ 0.9056
Chinese Yuan $/CY $ 0.1603
Hong Kong Dollar $ /HKD $ 0.129
Pound Sterling $/£ $ 1.6795
Mexican Peso $/MPeso $ 0.0765
Japanese Yen Y/$ y 0.0098
Euro $/Euro 1.3838
SDR $/SDR $ 0.7945

7. Your company has $10 million in excess cash for 3 months. As CFO, you can invest using the exchange rates and interest rates given above. You don’t want any foreign exchange exposure. Will you invest in US$ or UK£? Why? If you need more information, please obtain it from other sources. Show your calculations.

8. Define

i. Transaction Exposure

ii. Translation or Accounting Exposure

iii. Economic Exposure

iv.. How can Economic Exposure be hedged?

v.. Explain the rationale, or lack of it, behind the following quote attributed to a risk management consultant. “Some purely domestic firms should consider entering the international market to reduce their foreign exchange risk.