intl fin mngm Chp 6-10

Question 1

The theory of purchasing power parity says that

Answer 1

the exchange rate will adjust to reflect changes in the price levels of two countries

Question 2

the fisher effect assumes that the

Answer 2

nominal interest rate is equal to the real interest rate plus the inflation rate

Question 3

the international fisher effect says that the

Answer 3

future spot rate should move in an amount equal to, but in the opposite direction from, the difference in interest rates between two countries

Question 4

Us the following information to answer the next three questions. Assume the following: you have $10,000 to invest; the current spot rate of british pounds is $1.600; the 90 day forward rate of the pound is $1.80; the annual interest rate in the US is 10%; the annual interest rate in the Uk is 8%

Where would you invest your $10,000 to maximize your yield with no foreign exchange risk?

Answer 4

the UK

Question 5

Us the following information to answer the next three questions. Assume the following: you have $10,000 to invest; the current spot rate of british pounds is $1.600; the 90 day forward rate of the pound is $1.80; the annual interest rate in the US is 10%; the annual interest rate in the Uk is 8%

Which of the following is true:

• the investor would earn $1255 more by investing in the US instead of Uk
• the investor would earn $1255 more by investing in the Uk instead of the US
• The investor would earn $645 more by investing in the US instead of the Uk
• The investor would earn $645 more by investing in the Uk instead of US

Answer 5

2

Question 6

Us the following information to answer the next three questions. Assume the following: you have $10,000 to invest; the current spot rate of british pounds is $1.600; the 90 day forward rate of the pound is $1.80; the annual interest rate in the US is 10%; the annual interest rate in the Uk is 8%

Given the US interest rate, Uk interest rate, and the spot rate, what would be an equilibrium forward exchange quotation?

• 1.701
• 1.608
• 1.800
• 1.905
• 2.000

Answer 6

1.608

Question 7

The buyer and the seller in currency future markets agree on…

• a future delivery date
• price to be paid
• the quantity of the currency
• all of the above
• None of the above

Answer 7

2

Question 8

The main objective of hedgers in currency futures markets is to…

• make a profit
• protect against exchange risk
• make sure that foreign bills are collected
• protect against political risk
• None

Answer 8

protect against ex risk

Question 9

Currency futures contracts are normally available

• in a pre-determined amount for a specified maturity data
• in a flexbile maturity dates
• tailored to the desire of the buyer
• tailored to the desire of the seller
• tailored to the desire of both the buyer and the seller

Answer 9

1

Question 10

The forward market of foreign exchange offers contracts

• tailored to meet the needs of the buyers and sellers
• which are normally standardized
• which have a standardized maturity data
• which are regulated by the commodity futures commission
• which are available in a pre-determined amount

Answer 10

1

Question 11

Currency futures contracts are

• traded on organized exchanges
• actually settled for delivery
• backed by compensating balances
• handled by commercial banks
• handled by mutual savings banks

Answer 11

1

Question 12

The exchanges that trades currency options include

• the philedelphia stock exchange
• chicago mercantile exchange
• chicago board options exchange
• singapore stock exchange
• all of the above

Answer 12

5

Question 13

a strike price in currency options markets is the specified exchange rate at which the

Answer 13

option can be exercised

Question 14

A currency futures call option gives

• the buyer the obligation to buy a particular currency futures contract
• the seller the right to sell a particular currency futures contract
• the seller the obligation to sell a particular underlying currency
• the buyer the right to buy a particular currency futures contract

Answer 14

3

Question 15

Organized exchanges trade the following futures instruments:

• currency futures of any maturity
• standardized currency futures
• currency futures of any size
• currency futures sold in any currency
• none of the above

Answer 15

2

Question 16

currency futures contracts are acquired for the following purpose:

• hedging
• speculation
• arbitrage
• hedging and speculation
• all of the above

Answer 16

all of above

Question 17

Long=

Answer 17

buyer

Question 18

short

Answer 18

seller

Question 19

List three types of foreign exchange exposure for companies

Explain teh difference among the different types of exposures using examples.

Answer 19

trans-when a company has a collection or payment in future, denominated in foreign currency; exchange rate applied to firms home currency cash flows

econom- impact of changes in the rate on the value of the firm; risk applied to comps competitive position

translation- applied to the firms consolidated fin statements

Question 20

What effects (positive or negative) a change in exchange rate would have for U.S firm (using euro)

Answer 20

The effect a change in exchange rate could have on a company could be significant since the accounts on the income statement will be affected by changes in exchange rate. If exchange rate of foreign currency increases, then the domestic firm will have more expensive costs/expenses

• changes in exchange rate can affect not only firms that are directly engaged in international trade, but also purely domestic firms
• can affect: competitive position, decrease revenue, increase COGS, increase input prices, decrease operational profit, market share,
• when euro appreaciates; negative
• when euro depr; positive

Question 21

What are three types of operational hedging

Answer 21

• invoiving
• exposure netting
• lead and lag

Question 22

Explain hediging through invoive currency

Answer 22

• the firm can shift or share
• shift exchange rate risk; by invoicing foreign sales in home currency
• share exchange rate risk; by prorating the currency of the invoice between foreign and home currencies

Question 23

Exposure netting

Answer 23

a multinational firm should not consider deals in isolation, but should focus on hedging the firm as a portfolio of currency positions
-even if it’s not a perfect hedge, it may be too expensive or impractical to hedge each currency seperately

Question 24

Hedging via lead and lag

Answer 24

If a currency is appreciating, pay those bills denominated in that currency early; let customers in that in that country pay late as long as they are paying in that currency
-if a currency is depreciating, gives incentives to customers who owe you in that currency to pay early; pay your oblications denominated in that currency as late as your contracts will allow

Question 25

For AR in for currency, ____ collections of depr currency and ____ collections of appreciating currencies

Answer 25

speed up | slow down

Question 26

For AP in for currency, ____ collections of depr currency and ____ collections of appreciating currencies

Answer 26

slow down | speed up

Question 27

Margin requirements in currency futures markets are a form of___

Answer 27

collateral deposit

Question 28

A currency call option gives the

Answer 28

buyer the right to buy the underlying currency

Question 29

A currency put option gives the ___ underlying currency

Answer 29

buyer the right to sell

Question 30

Which of the following instruments is a financial derivative? - currency futures - currency forward - currency options - currency swap - all of the above

Answer 30

all of the above

Question 31

the sensitivity of realized domestic currency values of the firms contractual cash flows denominated in foreign currencies to unexpected exchange rate changes

Answer 31

transaction exposure

Question 32

the extent to which the value of the firm would be affected by unanticipated changes in exchange rates

Answer 32

economic exposure

Question 33

the potential that the firms consolidated fin statement can be affected by changes in exchange rates

Answer 33

translation exposure

Question 34

the choice between a forward market hedge and a money market hedge often comes down to

Answer 34

interest rate parity

Question 35

exchange rate risk of a foreign currency payable is an ex of

Answer 35

transaction exposure

Question 36

Suppose the US dollar substantially depreciates against the japanese yen. The change in ex rate - will tnd to weaken the competitive position of import competing US car makers - will tend to strengthen the competitive position of import competing US car makers - will tend to strengthen the comp position of japense car makers at th expense of US makers - none of the above

Answer 36

2

Question 37

In recent years, - the us dollar has appreciated substantially against most major currencies of the world, especially against the euro - the us dollar has depreciated substantially against most major currencies of the world, especially against the euro - the us dollar has maintained its value against most major currencies of the world, especially against the euro

Answer 37

2

Question 38

to hedge a foreign currency recievable

Answer 38

buy put options on the foreign currency

Question 39

A US firm has sold an italian firm 1,000,000 euros worth of product. In 1 year, the us firm gets paid. To hedge the us firm bought put options on the euro w a strike price of $1.65. They paid an option premium of $.01 per euro. If at maturity the ex rate is $1.60 - they firm will realize 1,645,000 on the sale net of the cost of hedging - they firm will realize 1,650,000 on the sale net of the cost of hedging - they firm will realize 1,640,000 on the sale net of the cost of hedging

Answer 39

1.65-.01=1.64x1,000,000 | 3

Question 40

buying a currency option provides - flexible hedge against exchange exposure - limits the downside risk while preserving the upside potential - a right, not an obligation, to buy or sell - all of the above

Answer 40

4

Question 41

a exporter faced w exposure to a depretiating currency can reduce transaction exposure w a strategy of

Answer 41

paying late, collecting early | bc its depritiating want to collect early before it depretiates further

Question 42

the choice between a forward market hedge and a money market hedge come down to

Answer 42

interest rate parity

Question 43

Explain the similarities and diff among futures, forward, and options market

Answer 43

They are all derivative or contingent claim securities. This means that their value is derived upon the value of the asset that underlies these securities. For and fut are contracts to buy or sell a certain quantity of a specific underlying asset at some specific price in the future. Futures however, are exchange traded, and there are standardized features that distinguish them from the tailor-made terms of a forward contract. Futures also have standard contract sizes and maturity dates. An option is a right, bot the obligation to buy r sell the underlying asset for a stated price over a stated period of time. Call options give the owner the right to buy, put options give the right to sell. American options can be exersized at any time during their life, and european options only at the time of maturity.

Question 44

speculators vs hedgers

Answer 44

spec: attempt to profit from anticipating the direction of future price changes hed: avoid risk of price change of the underlying asset hedgers are seen as risk-averse and speculator are seen as risk lovers

Question 45

what is meant by: in the money at the money out of the money

Answer 45

They are different for put and call options (St- expiration date, X- exercise price); An in the money call option means the option holder has the opportunity to buy the security below its current market price (St>X) An in the money put option means the option holder can sell the security above its current market price (StX- put option

Question 46

How would you define transaction exposure? How is it different than economic exposure

Answer 46

Transaction exposure is the sensitivity of realized domestic currency values of the firm’s contractual cash flows denominated in foreign currencies to unexpected changes in exchange rates. Unlike economic exposure, transaction exposure is well-defined and short-term.

Question 47

What are the advantages of a currency options contract as a hedging toll compared to the forward contracts

Answer 47

The main advantage of using options contracts for hedging is that the hedger can decide whether to exercise options upon observing the realized future exchange rate. Options thus provide a hedge against ex post regret that forward hedger might have to suffer. Hedgers can only eliminate the downside risk while retaining the upside potential

Question 48

discuss and compared hedging transaction exposure using the forward contract vs money market instruments. When do alternative hedging approaches produce the same result?

Answer 48

Hedging transaction exposure by a forward contract is achieved by selling or buying foreign currency receivables or payables forward. On the other hand, money market hedge is achieved by borrowing or lending the present value of foreign currency receivables or payables, thereby creating offsetting foreign currency positions. If the interest rate parity is holding, the two hedging methods are equivalent.

Question 49

What is PPP? And why doesn't PPP always hold?

Answer 49

A theory that states that the exchange rate will adjust to reflect changes in the price levels of two countries. Why it doesn't hold: -no basket of goods/commodities are consistent across countries -all goods in basket would have to be tradeable -prices would have to be perfectly flexible (no price controls) -market imperfections: transportation costs, transaction costs, trade barriers

Question 50

What is IRP? When do we say IRP holds

Answer 50

IRP is a no arbitrage condition under which investors will be indifferent to interest rates available in two countries IRP holds when markets are in equilibrium and there is no arbitrage opportunity. IRP doesn't hold when there are arbitrage opportunities.

Question 51

Explain the diff methods of operational hedging

Answer 51

hedging via invoice- a firm can avoid risk from the beginning by shifting or sharing their rate risk hedging via exposure netting- MN firm should focus on hedging the firm as a portfolio of currency positions (if US comp has a won recievable and yen payable. Firm should wait until these accounts come due and just buy the yen with won) Hedging via lead and lag: If AR for for. currency is appr- delay pmt If AR for for. currency is depr- accelerate pmt or get it now If AP for for. currency is appr- accelerate pmt or get it now If AP for for. currency is depr- delay pmt

Question 52

For a forward hedge, if you're going to pay foreign currency in future _____ currency forward

Answer 52

buy

Question 53

For a forward hedge, if you're going to recieve foreign currency in future _____ currency forward

Answer 53

sell

Question 54

For money market hedge, if there's a futures payable

Answer 54

borrow at home and invest in foreign country

Question 55

For money market hedge, if there's a futures recievable

Answer 55

borrow in foreign currency and invest in home country

Question 56

For options market hedge, if there's a futures payable

Answer 56

buy a call option on the currency

Question 57

for options market hedge, if there's a future recievable

Answer 57

buy put option on the currency

Question 58

what is the agreeed upon price or predetermine price

Answer 58

strike or exersize price (E or X)

Question 59

fee paid to buy the right

Answer 59

option price

Question 60

price of currency at the end of term of contract; spot price at expiration

Answer 60

price at expiration

Question 61

Buyer call option

Answer 61

has the right to buy a currency at a predetermined price

Question 62

seller call option

Answer 62

has an obligation to sell that currency at predetermine price

Question 63

buyer put option

Answer 63

has a right to sell currency at predetermined price

Question 64

Seller put option

Answer 64

has an obligation to buy that currency at predetermine price

Question 65

In an options contract, if you believe price will increase you should

Answer 65

be a buyer

Question 66

In an options contract, if you believe price will decrease you should

Answer 66

be a seller

Question 67

What are characteristics of a long call in options market

Answer 67

expectation price will increase mas loss is premium and max gain is unlimited as long as p increases grants a right to buy breakeven: x+c

Question 68

What are characteristics of a short call in options market

Answer 68

``` obligation for you to sell at fixed price expectation price decrease of stay same max benefit: premium mas loss: unlimited BE: X+C ```

Question 69

What are characteristics of a long put in options market

Answer 69

``` grants the right to sell a currency believes price will decrease max loss: premium max benefit: X-P (exersize preice - premium) BE: X-P ```

Question 70

What are characteristics of a short put in options market

Answer 70

``` obligation to buy believe that prices will increase max benefit: premium max loss: x-p BE:x-p ```

Question 71

If you're going to pay foreign currency in the future

Answer 71

buy currency forward

Question 72

if you're going to recieve currency in the future

Answer 72

sell currency forward