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Exam 9: Foreign Exchange Markets

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Question 1

Multiple Choice

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A U.S. investor has borrowed pounds, converted them to dollars, and invested the dollars in the United States to take advantage of interest rate differentials. To cover the currency risk, the investor should

A) sell pounds forward.
B) buy dollars forward.
C) buy pounds forward.
D) sell pounds spot.
E) none of the above

F) A) and D)
G) All of the above

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Question 2

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A drop in value of the dollar hurts U.S. importers and helps U.S. exporters, ceteris paribus.

A) True
B) False

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Question 3

Multiple Choice

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A Japanese investor can earn a 1% annual interest rate in Japan or about 3.5% per year in the United States. If the spot exchange rate is 101 yen to the dollar, at what one-year forward rate would an investor be indifferent between the U.S. and Japanese investments?

New York is the global center of foreign exchange trading with the largest daily volume of currency trading.

An investor starts with €1 million and converts it to £694,500, which is then invested for one year. In a year the investor has £736,170, which she then converts back to euros at an exchange rate of 0.68 pounds per euro. The annual euro rate of return earned was _____.

During much of the 1800s, developed nations employed what came to be known as the Bretton Woods international monetary system to manage exchange rates.

Foreign exchange trading in 2010 averaged about _____________ per day.

You can buy or sell the yen spot at ¥102 to the dollar. You can buy or sell the yen one-year forward at ¥104 to the dollar. If U.S. annual interest rates are 4%, what must be the approximate one-year Japanese interest rate if interest rate parity holds?

The ongoing accumulation of foreign currency reserves by foreign monetary authorities contributed to the dollar's drop in 2006.

The levels of foreign currency assets and liabilities at banks have ___________ in recent years and the level of foreign currency trading has ____________.

Bank's net foreign exposure is equal to

A U.S. bank converted $1 million to Swiss francs to make a Swiss franc loan to a valued corporate customer when the exchange rate was 1.2 francs per dollar. The borrower agreed to repay the principle plus 5% interest in 1 year. The borrower repaid Swiss francs at loan maturity and when the loan was repaid the exchange rate was 1.3 francs per dollar. What was the bank's dollar rate of return?

A negotiated OTC agreement to exchange currencies at a fixed date in the future but at an exchange rate specified today is a

If the dollar is initially worth 120 yen and then the exchange rate changes so that the dollar is now worth 115 yen, the value of the yen has depreciated.

The large U.S. current account deficit implies that

Which of the following conditions may lead to a decline in the value of a country's currency? I. Low interest rates II. High inflation III. Large current account deficit

If the euro per yen ratio falls, the value of the yen has risen.

A bank has committed to deliver yen in 6 months to a corporate customer. The spot rate is 110 yen to the dollar and the 6-month forward rate is 105 yen per dollar. Are there costs to hedging this exposure with the forward market? Explain.

The largest center for trading in foreign exchange is

The concept underlying purchasing power parity is the