Chapter 5, Problem 15QA

Which of the following statements is (are) FALSE? Select one or more alternatives: Studies suggest that forward exchange rates are unbiased predictors for future spot exchange rates in internationally integrated capital markets. If arbitrageurs have sufficient capital to trade on risk-free opportunities instantaneously, we will see persistent deviations from covered interest parity. If both uncovered interest parity hypothesis and covered interest parity hypothesis hold, we can predict what the spot exchange rate will be in one year from today based on today's one-year forward exchange rate. If forward exchange rates deviate from synthetic forward rates defined by covered interest rate parity, there will be risk-free arbitrage opportunities in efficient capital markets.

A U.S. exporting firm may use foreign exchange futures to hedge its exposure to exchange rate risk. Its position in futures will depend in part on anticipated payments from its customers denominated in foreign currency.a. In general, however, should its position in futures be more or less than the number of contracts necessary to hedge these anticipated cash flows? (Hint: Think about the firm's stream of cash flows extending out over many years.)b. What other considerations might enter into the hedging strategy?

A(n). OOO futures hedge is most likely to result in ongoing payments over the life of the foreign exchange instrument. options money market forward

If a firm must pay for goods it has ordered with foreign currency, it can hedge its foreign exchange rate risk by   Question 8 options:   A)  staying out of the exchange futures market.   B)  buying foreign exchange futures long.   C)  selling foreign exchange futures short.   D)  none of the above.

Discuss the risk confronting an interest rate and currency swap dealer in international Markets?

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 arbitrage

How can we obtain a pay-domestic-floating, receive-foreign-fixed currency swap by using a pay-domestic-fixed, receive-foreign-fixed currency swap and an appropriate interest rate swap?   Given the following American put option prices and current underlying share price of $304.75, check to see whether the given put options violate the lower bound condition. Where you detect a violation, devise an arbitrage strategy that will yield a positive cash flow now with zero possible cash flows in the future. Strike            Put price 300                 7.75 305                 8.15 310                 8.5 315                 9.05