🏷️ LIMITED TIME OFFER: GET 20% OFF GRADE+ YEARLY SUBSCRIPTION →
Log in
Finance
1
answer
0
watching
587
views
9 Oct 2018

A current account deficit commonly is accompanied by:

a) a financial account deficit and a government budget surplus

b) a financial account deficit and a government budget deficit

c) a financial account surplus and a government budget deficit

d) a financial account surplus and a government budget surplus

In hedging foreign currency receivables, the outcome from a forward position will be identical to the outcome from a money market hedge (also known as a spot transaction hedge) if

a) purchasing power parity holds

b) interest rate parity holds

c) either purchasing power parity or interest rate parity holds

d) both purchasing power parity and interest rate parity hold

An American multinational wants to hedge a euro receivable. Which of the following strategies does

NOT provide a hedge for the euro receivable?

a)buy put options on the euro with strike prices in dollars

b)buy put options on the euro with strike prices in pounds

c) buy call options on the euro with strike prices in pounds

d) buy call options on the euro with strike prices in dollars

In the spot market in New York, $0.80 may be exchanged for one Canadian dollar and $1.60 may be exchanged for one pound sterling. You may assume that bid and ask quotes are the same. If you can only exchange currency in New York, how many Canadian dollars would you receive in exchange for 1 pound sterling?

a) 0.5

b) 1.0

c) 1.6

d) 2.0

Observe the following dealer quotes for the euro in the New York spot market: The bid is $1.30 and the ask is $1.31. The dealer quotes for the euro in the Frankfurt spot market are the following: The bid is $1.28 and the ask is $1.29. Given these quotes, which of the following strategies would you employ to profit from an arbitrage opportunity?

a) Simultaneously buy euro in New York and sell euro in Frankfurt

b) Simultaneously buy euro in Frankfurt and sell euro in New York

c) Buy euro in Frankfurt and wait for euro to appreciate in Frankfurt before selling euro

d) Sell euro in New York and wait for euro to depreciate in New York before buying euro

Watch
1
answer
0
watching
587
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Jarrod Robel
Jarrod RobelLv2
11 Oct 2018

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related questions

You believe that IRP presently exists. The nominal annual interest rate in Mexico is 13%. The nominal annual interest rate in the U.S. is 4%. You expect that annual inflation will be about 4% in Mexico and 4.5% in the U.S. The spot rate of the Mexican peso is $.10. Put options on pesos are available with a one-year expiration date, an exercise price of $.1008, and a premium of $0.014 per unit.

You will receive 1 million pesos in one year.

a. Determine the amount of dollars that you will receive if you use a forward hedge.

b. Determine the expected amount of dollars that you will receive if you do not hedge and believe in purchasing power parity (PPP).

c. Determine the amount of dollars that you will expect to receive if you use a currency put option hedge. Account for the premium you would pay on the put option.

Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. • The spot exchange rate is $1.40/euro • The six month forward rate is $1.38/euro • Plains States' cost of capital is 11% • The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months) • The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months) • The U.S. 6-month borrowing rate is 8% (or 4% for 6 months) • The U.S. 6-month lending rate is 6% (or 3% for 6 months) • December put options for euro 625,000; strike price $1.42, premium price is 1.5% • Plains States' forecast for 6-month spot rates is $1.43/euro • The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro If Plains States locks in the forward hedge at $1.38/euro, and the spot rate when the transaction was recorded on the books was $1.40/euro, this will result in a "foreign exchange ______ " accounting transaction of ________

1. Which of the following statements about Multinational financial management is FALSE:

a. The effects of changing currency values must be included in financial analyses.

b. Legal and economic differences must be considered in financial decisions.

c. Political risk must be included from multinational corporate financial analyses.

d. It is illegal and discriminatory to consider cultural differences when considering firm goals and employee management.

2. ______________ occurs if a firm has assets or liabilities in foreign countries.

a) Translation Exposure

b) Transaction Exposure

c) Economic Exposure

d) Political Exposure

3. _______________ says that the ratio of forward exchange rates to spot exchange rates must also equal the ratio of nominal risk free rates.

a) Fisher Effect

b) Interest Rate Parity

c) Purchasing Power Parity

d) Inflation Parity

4. Which statement is FALSE?

a The United States has a large current account deficit in its balance of payments

b A Eurodollar is a US dollar deposited in a bank outside of the US

c American Depository Receipts represent ownership of stock of foreign companies

d An Interest Rate Swap is when banks lend to each other

5. In the currency markets, 1 U.S. dollar = 0.6 British pound and 1 U.S. dollar equals 1.1 euros. Wolverine Cola produces cherry cola in England at a cost of 0.55 British pound per unit. The product is sold in France for 1.25 euros. In terms of U.S. dollars, how much profit is Wolverine realizing on each unit sold?

a. $0.78 b. $0.46 c. $0.35 d. $0.11

Related Documents

L11 Econ 1021
Final Exam
Study Guide
L11 Econ 1021 Study Guide - Midterm Guide: Federal Open Market Committee, Demand Curve, Autonomous Consumption
harlequinimpala978
FIN 621 Chapter 5: CFIN 621- Chapter 5- International Parity Relationships and Forecasting Foreign Exchange Rates .docx
viridianfish136
L11 Econ 1021 Chapter Notes - Chapter 8: Risk Premium, Opportunity Cost, Credit Risk
limebee41

Weekly leaderboard

Home
Homework Help 3,900,000
Finance 370,000
Start filling in the gaps now
Log in