They are tradable on recognised exchanges They normally mature in three-month cycles They require the payment of initial margin They allow hedging companies to take advantage of favourable movements They come in standardised contract sizes
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- Match each term in Column A with its related definition in Column B. Column A 1. ____________ Spot rate 2. ____________ Currency appreciation 3. ____________ Translation risk 4. ____________ Transaction risk 5. ____________ Exchange rate Column B a. The rate at which one currency can be traded for another currency. b. The possibility that future cash transactions will be affected by changing exchange rates. c. A month ago, 1 U.S. was worth 8.5 Mexican pesos. Today, 1 is worth 9.0 Mexican pesos. The U.S. dollar has undergone what? d. The degree to which a firms financial statements are exposed to exchange rate fluctuation. e. The exchange rate of one currency for another for immediate delivery (today).a) Distinguish between transaction exposure, economic exposure, and translation exposure to currency risk. b) Discuss the key differences between the operation of a currency forward market and a futures market. c) Assume that the current (indirect for the UK) spot exchange rate of one pound to the dollar is $1.60/£ and that the corresponding three-month forward exchange rate is $1.59/£. Also, assume that the annualised 3-month interest rate on the pound is currently 4.00% and that the corresponding interest rate on the US dollar is 2.50%. Required:(i) Given the information above, will you invest in the pound or borrow the pound? Explain why.(ii) Calculate the amount of profit that you will realise on each pound that you borrow or invest.11. A forward transaction refers to the: A. spot rate B. exchange rate that is determined at a specified date beyond the spot rate C. exchange rate that is specified now, but with delivery and payment at some predetermined future date D. upper limit of a currency bid-ask spread 13. If differences occur for FX rates between three or more currencies, FX dealers may perform: A. locational arbitrage B. triangular arbitrage C. cross arbitrage D. speculative arbitrage
- Are there any limitations in the use of currency futures contracts when locking in a specific exchange rate at which company can sell all the pounds it expects to receive in each of the upcoming months?MCQ & True/false : International Financial Management: 1. Which of the following is true of options? (a) The buyer decides if the options will be exercised. (b) The seller decides if the options will be exercised. (c) The seller pays the buyer the option premium. (d) All of the above 2. Currency futures contracts specify a standard volume of a particular currency to be exchanged on a specific settlement date at a specified exchange rate. (a) True (b) False 3. A UK-based MNC expects to receive £20,000 from domestic operations and 20,000 Euro (€) from a business in Belgium. If the pound’s value is €1.0959, they expected total cash flow in pound are: (a) £42,000 (b) £41,000 (c) £39,470 (d) £38,250Suppose you observe the following exchange rates and interest rates for the USD and THB: Bid Ask USD/THB 30.01 30.31 USD/THB F,360 ? ? Trader lends at Trader borrows at I USD 1.55% 1.75% I THB 0.60% 0.85% Which answer is closest to the minimum forward ask (USD/THBAF,360) that prevents covered interest rate arbitrage? 25.29 29.67 30.13 30.97 29.97
- A currency speculator wants to speculate on the future movements of the €. The speculator expects the € to appreciate in the near future and decides to concentrate on the nearby contract. The broker requires a 2% Initial Margin (IM) and the Maintenance Margin (MM) is 75% of IM. Following € Futures quotes are currently available from the Chicago Mercantile Exchange (CME). Euro (CME) - €125,000; $/€ Open High Low Settle Change Open Interest June 1.2216 1.2276 1.2175 1.2259 -0.0018 255,420 Sept 1.2229 1.2288 1.2189 1.2269 - 0.0018 19,335 In addition to the information provided above, consider the following CME quotes that are available at the end of day one’s trading: Euro (CME) - €125,000; $/€ Open High Low Settle Change Open Interest June 1.2216 1.2276 1.2175 1.2176 -0.0083…Assume that interest rate parity holds. In the spot market 1 Japanese yen = $0.00905, while in the 90-day forward market 1 Japanese yen = $0.00913. In Japan, 90-day risk-free securities yield 1%. What is the yield on 90-day risk-free securities in the United States? Do not round intermediate calculations. Round your answer to two decimal places.PQ 3 In which of the following relationships between the expected future spot rate (E(e)) of a foreign currency and the current forward rate (e fwd) of a foreign currency would a speculator have an incentive to sell foreign currency in the forward market? a. E (e) = e fwd bb. E(e) greater than e fwd c. E(e) less than e fwd d. E (e) = (1/d fwd)
- Assume you can exchange $1 for either £1.0 or €0.50 in the U.S. In the London market, you can exchange £1 for €0.52. This situation creates an opportunity to profit immediately from which one of the following? A. Futures arbitrage B. Currency hedge C. Interest rate swap D. Absolute purchasing power parity E. Triangle arbitrageQ1-10 If a PPP estimate of the dollar/pound exchange rate is $1.61/£ and the current spot rate is observed to be $1.68/£, on the basis of these two rates you should, viewing the long-run, a. expect the dollar to appreciate against the pound. b. take a "short" position in dollars. c. expect the pound to appreciate against the dollar. d. have no expectation regarding the likely movement of the dollar/pound exchange rate.Q1-16 In which of the following relationships between the expected future spot rate [E(e)] of a foreign currency and the current forward rate (efwd) of a foreign currency would a speculator have an incentive to sell foreign currency in the forward market? a. E(e) < efwd b. E(e) > efwd c. E(e) = efwd d. E(e) = (1/efwd)
