8.3 Exchange Rates - Systems and Calculations Flashcards
If the annual U.S. inflation rate is expected to be 3%, and the Ptomanian ptoma is expected to depreciate against the U.S. dollar by 12%, a Ptomanian firm importing from its U.S. parent can expect the ptoma costs of imports denominated in dollars to
A. Increase by about 17%.
B. Decrease by about 12%.
C. Increase by about 3%
D. Decrease by about 5%.
A. Increase by about 17%.
Inflation in the U.S. means that $1.03 now has the purchasing power formerly enjoyed by $1.00. The 12% depreciation of the ptoma means that its purchasing power in dollars has declined to 88%. Dividing the U.S. inflation factor of 1.03 by the new ptoma value of .88 and subtracting 1 results in a net loss of ptoma purchasing power against the dollar of 17.05%.
The spot rate for one Australian dollar is US $0.92685 and the 60-day forward rate is US $0.93005. Which one of the following statements is consistent with these facts?
A. The U.S. dollar has gained purchasing power with respect to the Australian dollar.
B. The U.S. dollar is trading at a forward premium with respect to the Australian dollar.
C. The U.S. dollar is trading at a forward discount with respect to the Australian dollar.
D. The U.S. dollar has lost purchasing power with respect to the Australian dollar.
C. The U.S. dollar is trading at a forward discount with respect to the Australian dollar.
The exchange rate for the Australian dollar is higher in the forward market than the spot market; the Australian dollar is therefore trading at a forward premium. From this, it follows that the U.S. dollar is trading at a forward discount.
A French firm conducts a significant amount of business in the United States and Great Britain. The company uses the euro (EUR) in its financial statements. The Controller is reviewing the results from the most recent quarter and is attempting to explain variances due to exchange rate fluctuations between the euro, and the U.S. Dollar (USD) and the euro and the British Pound (GBP). She used the following currency cross rates from a leading financial publication (FCU = foreign currency unit).
Currency Cross Rates - Beginning of Quarter
U.S. $ per FCU: EUR 1.202 / GBP 1.801
Euro per FCU: USD 0.832 / GBP: 1.503
UK Pound per FCU: USD 0.553 / EUR 0.665
Currency Cross Rates - End of Quarter
U.S. $ per FCU: EUR 1.307 / GBP 1.919
Euro per FCU: USD 0.765 / GBP 1.468
UK Pound per FCU: USD 0.523 / EUR 0.681
Based on the above information, during the quarter the euro
A. Appreciated relative to the GBP and to the USD.
B. Appreciated relative to the GBP and depreciated relative to the USD.
C. Depreciated relative to the GBP and to the USD.
D. Appreciated relative to the USD and depreciated relative to the GBP.
A. Appreciated relative to the GBP and to the USD.
The euro appreciated relative to both the GBP and to the USD during the quarter. It takes $1.307 to buy one euro versus only $1.202 at the beginning of the quarter. Similarly, 0.681 UK Pound are required for one euro verses only 0.665 UK Pound at the beginning of the quarter.
Given a spot rate of $1.8655 and a 90-day forward rate of $1.8723, the pound sterling in the forward market is
A. Undervalued.
B. Being quoted at a discount.
C. Overvalued.
D. Being quoted at a premium.
D. Being quoted at a premium.
The pound costs more on the forward market than it does on the spot market, indicating an anticipated gain in purchasing power (resulting in a forward premium).
A mid-sized corporation based in the United States needs to pay a German company 10,000 euros in 30 days for materials the corporation is importing to the United States. Today’s spot rate for the euro is $1.2535 U.S. dollars. The 30-day forward rate for the euro is $1.2313 U.S. dollars. Ignoring interest rates,
A. The dollar gains purchasing power over the next 30 days.
B. The dollar loses purchasing power over the next 30 days.
C .The dollar is at a discount against the euro in the spot market and undervalued in the forward market.
D. The dollar is at a premium against the euro in the spot market and overvalued in the forward market.
A. The dollar gains purchasing power over the next 30 days.
The corporation will pay fewer dollars for 10,000 euros in 30 days that it will today. In 30 days, it can pay $1.2313 U.S. dollars per euro, but if it were to pay today using the spot rate, it would pay $1.2535 U.S. dollars per euro. The bill is at a fixed price. Ignoring interest rates, it is cheaper in dollars for the corporation to pay the bill in 30 days. Therefore, the purchasing power of the dollar increase over the next 30 days.
Assume the spot rate of the Canadian dollar is $.90. If the spot rate one year from now is $.85, the Canadian dollar will have
A. Depreciated by 5.88%
B. Appreciated by 5.56%
C. Appreciated by 5.88%
D. Depreciated by 5.56%
D. Depreciated by 5.56%
After a year’s time, a single Canadian dollar now fetches fewer U.S. dollars, indicating a loss of purchasing power (depreciation). The spread is 5.56% [($.90 - $.85) / $.90].
One U.S. dollar is being quoted at 100 Japanese yen on the spot market and at 102.5 Japanese yen on the 90-day forward market; hence, the annual effect in the forward market is that the U.S. dollar is at a
A. Discount of 0.0025%
B. Discount of 10%
C. Premium of 10%
D. Premium of 2.5%
C. Premium of 10%
A forward currency premium or discount is calculated by multiplying the percentage spread by the number of forward periods in a year
[(Forward rate - spot rate) ÷ Spot Rate] x (Days in year ÷ Days in forward period)
In this case, the calculation is as follows:
Forward premium
= [(¥102.5 – ¥100) ÷ ¥100] × (360 ÷ 90)
= 0.025 × 4
= 10%
An overvalued foreign currency exchange rate
A. Represents a tax on exports and a subsidy to imports.
B. Has no effect on capital flows but does affect trade flows.
C. Has an effect on capital flows but no effect on trade flows.
D. Represents a subsidy to exports and a tax on imports.
A. Represents a tax on exports and a subsidy to imports.
If a country’s currency is strong, its goods and services are more expensive to foreign consumers. At the same time, foreign goods become relatively more affordable to domestic consumers.
The spot rate for the U.S. dollar is £0.6543, and the 60-day forward rate is £0.6521. The pound is selling at
A. A forward premium with respect to the dollar.
B. Interest rate parity with the dollar.
C. A forward discount with respect to the dollar.
D. International Fisher parity with the dollar.
A. A forward premium with respect to the dollar.
A dollar fetches fewer pounds in the forward market than in the spot market. By the same token, it takes fewer pounds to buy a dollar in the forward market than it does in the spot market. The pound is thus expected to gain purchasing power with respect to the dollar and is therefore selling at a forward premium.
A U.S. company took out a 12-month, 4% loan of £10,000 when the spot rate was $2 to £1. At the end of the loan term, the spot rate was $2.10 to £1. What was the company’s effective rate on this loan?
A. 4.00%
B. 9.20%
C. 5.60%
D. 0.95%
B. 9.20%
The effective interest rate on a loan denominated in a foreign currency is affected by changes in the exchange rates during the time the loan is outstanding. First, the amount borrowed is stated in terms of the borrowing party’s domestic currency [£10,000 × ($2.00 per £1) = $20,000]. The maturity amount of the loan in the foreign currency is then calculated (£10,000 × 1.04 = £10,400). This amount is then converted to the domestic currency at the spot rate in effect on the maturity date [£10,400 × ($2.10 per £1) = $21,840]. The difference in the amounts at the two dates is determined ($21,840 – $20,000 = $1,840), and this amount is divided by the face amount of the loan ($1,840 ÷ $20,000 = 9.2%).
Suppose that Swiss wrist watches priced in Swiss francs become very popular among U.S. consumers while Britain experiences relatively higher inflation than the United States at the same time. Assuming that all other economic parameters remain constant, which one of the following statements is most accurate?
A. The U.S. dollar will appreciate relative to both the Swiss franc and the British pound.
B. The U.S. dollar will depreciate relative to both the Swiss franc and the British pound.
C. The U.S. dollar will appreciate relative to the Swiss franc and depreciate relative to the British pound.
D. The U.S. dollar will depreciate relative to the Swiss franc and appreciate relative to the British pound.
D. The U.S. dollar will depreciate relative to the Swiss franc and appreciate relative to the British pound.
The Swiss franc is gaining purchasing power with respect to the U.S dollar. Therefore, the Swiss franc is said to have appreciated against the U.S dollar. By the same token, the U.S. dollar is said to have depreciated (lost purchasing power) against the Swiss franc. Inflation of a currency relative to a second currency causes the first currency to depreciate relative to the second. Because Britain is experiencing higher inflation than the U.S., the British pound depreciates relative to the U.S. dollar. By the same token, the U.S dollar is said to have appreciated against the British pound.
