Chapter 27 Quiz, Managing Risk




1. If the direct quotation for the euro is $1.16/euro, what is the indirect quotation?
A.1.16
B.–1.16
C.0.862
D.None of the above


2. The spot lira/dollar exchange rate is 833 lira/$. The 3-month forward rate is 863 lira/$. What is the lira's forward premium (or discount) on the dollar, expressed as an annual rate?
A.4% discount
B.4% premium
C.14% discount
D.14% premium


3. A currency forward contract is described by:
A.Agreeing today to buy or sell specified amount of a currency at a later date at a price set in the future
B.Agreeing today to buy or sell specified amount of a currency today at its current price
C.Agreeing today to buy or sell specified amount of a currency at a later date at a price set today
D.None of the above


4. The spot lira/$ exchange rate is 833 lira/$ and the one year forward rate is 863 lira/$. If the annual interest rate on dollar CDs is 9½%, what would you expect the annual interest rate to be on lira CDs?
A.3.5%
B.5.3%
C.13.4%
D.25.6%
E.Need more information to solve


5. The Mexican economy is predicted to average double digit inflation over the next two years of 22% per annum. The forecast for the US is 2.5% per annum. If the current exchange rate is $0.1177/peso, what will be the exchange rate two years from now?
A.$0.831
B.$0.989
C.$0.1401
D.$0.1667


6. The expectations theory of forward rates implies that:
A.The forward rate is determined by government's expectations
B.On average, the forward rate is equal to the future spot rate
C.The forward rate is determined by expectations of the future spot interest rate
D.The forward rate is equal to the future spot rate


7. Assume that international capital markets are competitive and that the Fisher hypothesis holds. The one-year interest rate is approximately 10% in the USA and 5% in Switzerland. If the expected inflation rate is 10% in the USA, what is the expected inflation rate in Switzerland?
A.15%
B.10%
C.7%
D.5%
E.None of the above


8. Suppose the spot exchange rate is 2 US dollars per British pound. The forward exchange rate is 1.9 dollars per pound. Which of the following is true?
A.The US inflation rate is lower
B.The pound is selling at a premium
C.The pound is selling at a discount
D.US interest rates are lower


9. Suppose that the Eron company knows that it must pay £7 million for goods that it will receive in Britain. The current exchange rate is $1.75/£. the risk that the corporate treasurer faces is that:
A.The pound exchange rate falls in a month's time to $1.50/£
B.The pound exchange rate rises in a month's time to $2.00/£
C.The pound exchange rate does not change from its current position
D.The pound exchange rate falls in a month's time to $1.25/£


10. US exporter is expecting a payment of BP 5 million in 3 months. The exporters can hedge this position by borrowing BP and converting it to dollars at the spot rate and investing the dollars in short-term instruments. This is called:
A.Forward market hedge
B.Money market hedge
C.Option market hedge
D.None of the above


11. Spot rate = BP 0.6024/US$; 3-month forward rate = BP 0.6040/US$. TE Company is expecting a payment of BP 100 million in 3 months. If the firm hedges this transaction in forward market what is the US$ amount it will receive in three months? (Ignore transaction costs)
A.US$165.56 million
B.US$166.00 million
C.US $60.40 million
D.None of the above


12. World Exports is expecting to receive DM 10 million in three months. It can take the following actions today except:
A.Use the forward market to hedge the amount
B.Use the options market to hedge the amount
C.Use the money market to hedge the amount
D.Do nothing
E.All of the above are valid strategies


13. An exporter in the USA is expecting a payment of BP 5 million in three months. He is planning to hedge the position using options. He should:
A.Buy call options
B.Buy put options
C.Write put options
D.None of the above


14. Political risk is defined as:
A.Unanticipated changes in exchange rates
B.Unanticipated actions by the host government affecting the cash flows of a project
C.Unanticipated actions by the World Bank affecting the cash flows of a project
D.All of the above


15. Interest rate parity is ensured by
A.The government
B.The World Bank
C.Arbitrage
D.None of the above



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