ADM 3318 Lecture Notes - Lecture 12: Foreign Exchange Market, Bretton Woods System
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Which of the following most accurately describe the operation of the Bretton Woods system of adjustable pegged exchange rates? Check all that apply.
Countries can always reach their domestic stabilization objectives by devaluing their currencies.
A semi-fixed exchange rate system ties currencies to each other to provide stable exchange rates for commercial and financial transactions.
Countries can devalue or revalue its currency so as to restore payments balance.
Adjustable pegged rates enable estimates of the equilibrium rate to which a currency should be re-pegged.
Why do nations use a crawling peg exchange rate system?
To make small but frequent exchange rate adjustments promoting payments balance
To enable short-term volatility and longer-term swings in exchange rates that overshoot values justified by fundamental conditions
To make significant exchange rate adjustments promoting payments balance
To implement par value changes in a small number of large steps
Use the following categorization table to indicate the case for and the case against a system of floating exchange rates.
|
For or |
Against |
||
|---|---|---|---|
| It enables continuous adjustments of payments balances. | |||
| It reduces the need for international reserves. | |||
| It leads to disorderly exchange markets. | |||
| It may be inflationary. |
Compute the expected return of a portfolio given these three economic states, their likelihoods, and the potential returns:
Economic State Probability Return
Fast Growth 20.00% 30.00%
Slow Growth 50.00% 6.00%
Recession 30.00% -2.00%
Answer
| | | 8.40% |
| | | 11.33% |
| | | 12.65% |
| | | 15.47% |
Compute the standard deviation of a portfolio given these three economic states, their likelihoods, and the potential returns:
Economic State Probability Return
Fast Growth 20.00% 30.00%
Slow Growth 50.00% 6.00%
Recession 30.00% -2.00%
Answer
| | | 1.28% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | 4.36% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | 7.82% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | 11.34% Year-to-date, Company O had earned -2.10% return. During the same time period Company V earned 8.00% and Company M earned 6.25%. If you have a portfolio made up of 40.00% Company O, 30.00% Company V, and 30.00% Company M, what is the overall portfolio return? Answer
|
Compute the expected return of a portfolio given these three economic states, their likelihoods, and the potential returns:
Economic State Probability Return
Fast Growth 20.00% 30.00%
Slow Growth 50.00% 6.00%
Recession 30.00% -2.00%
Answer
| | | 8.40% |
| | | 11.33% |
| | | 12.65% |
| | | 15.47% |
Compute the standard deviation of a portfolio given these three economic states, their likelihoods, and the potential returns:
Economic State Probability Return
Fast Growth 20.00% 30.00%
Slow Growth 50.00% 6.00%
Recession 30.00% -2.00%
Answer
| | | 1.28% |
| | | 4.36% |
| | | 7.82% |
| | | 11.34% |
Year-to-date, Company O had earned -2.10% return. During the same time period Company V earned 8.00% and Company M earned 6.25%. If you have a portfolio made up of 40.00% Company O, 30.00% Company V, and 30.00% Company M, what is the overall portfolio return?
Answer
| | | 5.778% |
| | | 4.270% |
| | | 6.871% |
| | | 3.435% |
Risk that CAN BE eliminated through proper diversification is called _____.
Answer
| | | market risk |
| | | firm-specific risk |
| | | systematic risk |
| | | non-diversifiable risk |
GIVEN: Spot Rate: 1 X = 1.02 Y
30 Day Forward Rate: 1 X = 1.15 Y
Your currency is "X" and you will be paying 345Y. You would ____ because _____.
Answer
| | | pay now; of the irrelevance of payment time |
| | | pay now; it will take less "X" |
| | | pay in 30 days; it will take less "X" |
The amount of one currency needed to purchase one unit of another currency is the _____.
Answer
| | | derivative rate |
| | | exchange rate |
| | | backwardation rate |
| | | over-the-counter rate |
The price of an option is called a(n) _____.
Answer
| | | expiration cost |
| | | holding cost |
| | | premium |
| | | proceeds |
When a futures contract expires, the parties usually _____.
Answer
| | | have a party when losses are low |
| | | take delivery of the contract asset |
| | | do a cash settlement |
| | | swap off liabilities. |
When a forward contract expires, the parties will _____.
Answer
| | | have a party when losses are low |
| | | deliver the contract asset |
| | | do a cash settlement |
| | | swap off liabilities. |
Any asset whose value is derived from the value of some underlying asset is a(n) ____.
Answer
| | | derivative |
| | | primary capital |
| | | spot asset |
| | | intermediary asset |
Which of the following is not traded on an exchange?
Answer
| | | options |
| | | futures |
| | | forwards |
| | | they are all exchange-traded |
A system under which a country's exchange rates are tied to another currency by government policy is _____.
Answer
| | | floating exchange rates |
| | | pegged exchange rates |
| | | convertible exchange rates |
| | | forward rates |
One of the _______ for business with a floating exchange rate system is the _______ planning business activities in an international market.
Answer
| | | disadvantages; difficulty of |
| | | advantages; easiness of |
| | | irrelevant situations; normal |
| | | none of the above |
U.S. dollars deposited in foreign banks are called _____ and interest paid on these deposits is normally tied to _____.
Answer
| | | non-foreign deposits; FED funds rate |
| | | indirect dollars; Discount Funds Rate |
| | | Eurodollars; LIBOR |
| | | none of the above |
____ is a disadvantage of the gold standard.
Answer
| | | Excess currency slowing economic growth |
| | | Excess inflation |
| | | A non-variable beta |
| | | Lack of currency to promote continued economic expansion |
A monetary system in which paper money can be converted directly to gold is a(n) ___.
Answer
| | | dollar backed float |
| | | gold standard |
| | | currency float |
| | | Americanized gold standard |
| | | none of the above |
Reason(s) for the Great Depression following the Great War include:
Answer
| | | trade protectionism |
| | | isolationism |
| | | nationalism |
| | | all of the above |
| | | none of the above |
An agreement between the WW II allies in 1944 designed to prevent the problems leading to the Great Depression and WW II and to rebuild Asia and Europe was the _____.
Answer
| | | Armistice of 1945 |
| | | Bretton Woods Agreement |
| | | Lend Lease Act for Asia and Europe |
| | | none of the above |
A derivative is used to ____ thereby _____.
Answer
| | | float; gaining excess currency for expansion |
| | | peg currency; improving trade with a primary partner |
| | | hedge; reducing/eliminating risk |
| | | none of the above |
Easier business planning is an advantage of the ______ system.
Answer
| | | mixed exchange rate |
| | | floating exchange rate |
| | | derivative exchange rate |
| | | gold standard |
| | | none of the above |
____ is the chance that some unfavorable event will occur.
Answer
| | | Expected return |
| | | Risk |
| | | Coefficient of variation |
| | | Correlation |
