Reference no: EM132248931
Refer to the following information for Questions 1-5:
S$/€: $1.20/€ F$/€: $1.08/€ (one-year)
i€ : 0.00% (one-year) i$: 2.00% (one-year)
Question 1. Suppose you are a U.S. investor and decide to make a covered investment of your dollars in Euro assets for one year. What is your percentage return measured in U.S. dollars?
a. -10.00%
b. -5.50%
c. 15.50%
d. 16.67%
Question 2. Does the interest rate party hold?
a. Yes
b. No
Question 3. Everything else equal, in which currency would you like to make an investment for one year?
a. In dollars.
b. In Euros.
c. Indifferent; they provide equal returns.
Question 4. If the euro is a foreign currency for you and you have an A/R in euro. From a financial perspective, would you like to hedge your position with a straight forward or a synthetic forward?
a. Straight forward
b. Synthetic forward
Question 5. At what forward rate does interest rate parity hold?
a. $1.2000/€
b. $1.2240/€
c. $1.3000/€
d. $1.4300/€
Question 6. On August 15, 2007, the one-year interest rate for the U.S. dollar (US$ LIBOR) was 5.20875% and the equivalent yen interest rate (yen LIBOR) was 1.06500%. Based on interest rate parity, which currency should have a forward premium?
a. The yen.
b. The dollar.
Question 7. On December 31, 2004, the one-year interest rate for the U.S. dollar (US$ LIBOR) was 3.1000% and the equivalent yen interest rate (yen LIBOR) was 0.0925%. Based on interest rate parity,
a. the dollar should be at a forward premium of about 3% against the yen.
b. the yen should be at a forward premium of about 0.0925% against the dollar.
c. the dollar should be at a forward premium of about 3.1000% against the yen.
d. the yen should be at a forward premium of about 3% against the dollar.
Question 8. Suppose the U.S. dollar interest rate is 6% for one-year investment and the equivalent Japanese yen investment is 1%. The market expects that the spot exchange rate between the dollar and the yen will stay unchanged for the next year. Which of the following would constitute a "carry trade"?
a. Borrow U.S. dollar, convert to Japanese yen, and invest in yen for one year.
b. Borrow Japanese yen, convert to U.S. dollar, and invest in dollar for one year.
c. Borrow U.S. dollar, convert to Japanese yen, and invest in dollar for one year.
d. Borrow Japanese yen, convert to U.S. dollar, and invest in yen for one year.
Question 9. If the dollar interest rate is 5% (for one year investment), the equivalent SF interest rate is 8%, and spot exchange rate is $1.10/SF, what is the one-year forward exchange rate under interest rate parity?
Question 10. Under a currency board arrangement, the Hong Kong dollar has been pegged to the U.S. dollar since October 17, 1983. When the U.S. interest rate rises, what should the Hong Kong monetary authority do to maintain the currency peg, as required by the interest rate parity?
a. The Hong Kong monetary authority should keep its interest rate unchanged.
b. The Hong Kong monetary authority should lower its interest rate.
c. The Hong Kong monetary authority should raise interest rate as well.
Question 11. On January 22, 2015, the Brazilian central bank raised the Selic rate to 12.50%. "The 50 basis point increase lifted Brazil's benchmark rate to the highest level since August 2011 - a widely expected but aggressive move to tackle stubbornly high inflation and regain investors' trust." (The Financial Times, "Brazil benchmark rate at 3 year high," January 22, 2015. The U.S. central bank's policy interest rate, the federal funds rate, was close to zero at this time. If this dramatically higher interest rate differential stayed for an extended period of time, according to the international Fisher effect, the Brazilian currency, the real, would be expected to _____ in the future.
a. appreciate against the dollar
b. depreciate against the dollar
c. remain unchanged with respect to the value of the dollar
Question 12. According to the international Fisher effect, if an investor purchases a five-year U.S. bond that has an annual interest rate of 5% rather than a comparable British bond that has an annual interest rate of 6%, then the investor must be expecting the to at a rate of at least 1% per year over the next 5 years.
a. British pound; appreciate
b. U.S. dollar; appreciate
c. U.S. dollar; depreciate
Question 13. states that the spot exchange rate should change in an equal amount but in the opposite direction to the difference in interest rates between two countries.
a. Fisher-open
b. Fisher-closed
c. The Fisher effect
Question 14. Assume the current U.S. dollar-British spot rate is £0.6993/$. If the current nominal one- year interest rate in the U.S. is 5% and the comparable rate in Britain is 6%, what is the approximate forward exchange rate for 360 days?
a. £1.4300/$
b. £0.6927/$
c. £0.6993/$
d. £0.7060/$
Question 15. Assume the current U.S. dollar-yen spot rate is 125¥/$. Further, the current 180-day interest rate is 1.00% for the Japanese yen and 2.95% for the U.S. dollar (interest rates are annualized). What is the 180-day forward exchange rate according to interest rate parity?
a. 123.80¥/$
b. 124.00¥/$
c. 124.39¥/$
d. 124.67¥/$
Question 16. The theory of states that the difference in the national interest rates for securities of similar risk and maturity should be equal to but opposite in sign to the forward rate discount or premium for the foreign currency, except for transaction costs.
a. international Fisher effect
b. absolute PPP
c. interest rate parity
d. the law of one price
Question 17. Covered interest arbitrage moves the market equilibrium because
a. toward; purchasing a currency on the spot market and selling in the forward market narrows the differential between the two.
b. toward; investors are now more willing to invest in risky securities.
c. away from; purchasing a currency on the spot market and selling in the forward market increases the differential between the two.
d. away from; demand for the stronger currency forces up interest rates on the weaker security.
Question 18. The combination of interest rate parity and the international Fisher effect implies that
a. The forward rate has nothing to do with the expected future spot rate.
b. The future spot rate is always the same as the forward rate.
c. The forward rate is an unbiased predictor of the future spot rate.
Question 19. Refer to the information below (Source: The Wall Street Journal, January 27, 2015).
According to the international Fisher effect, what is the expected exchange rate between the U.S. dollar and the euro in 10 years?
Question 20. According to a Wall Street Journal report on January 28, 2015, "Greek bonds maturing in 2019, issued last year at a yield of just under 5%, now yield over 13%. As a whole, Greek bonds are closing in on the highs they hit in early January when markets first began to worry about the prospect of a Syriza victory." ("Greek Markets Continue to Slide," The Wall Street Journal, Jan. 28, 2015).
Suppose the Greek bond's (€1,000 par value) coupon rate was zero and the yield to maturity was 5%. Assume that exactly one year has passed since the bond issuance and there was still four years before the bond would mature.
On January 28, 2014, the exchange rate between the euro and the U.S. dollar was $1.3662/€. On January 28, 2015, the exchange rate was $1.1310/€. As a U.S. investor, if you had purchased the Greek bonds at issuance (on January 28, 2014), what was your return, measured in U.S. dollars, if you sold the bonds on January 28, 2015?
Refer to the information for Questions 21 through 25.
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Swap Points (in dollars)
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Bid (In dollars)
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Ask (In dollars)
|
|
Spot
|
|
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1.247700
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1.247900
|
1M FWD
|
5.31
|
6.31
|
|
|
3M FWD
|
24.63
|
25.38
|
|
|
6M FWD
|
54.33
|
54.93
|
|
|
1Y FWD
|
125.95
|
129.7
|
|
|
Question 21. What is the bid price of the British pound in the one-month forward market? Keep six digits after the decimal point.
Question 22. What is the ask price of the British pound in the three-month forward market? Keep six digits after the decimal point.
Question 23. What is the mid-point price of the British pound in the six-month forward market? Keep six digits after the decimal point.
Question 24. What is the annualized forward premiums for the dollar in the one-year forward market? Keep four digits after the decimal point (in percentage).
Question 25. What is the annualized forward premiums for the British pound in the one-year forward market? Keep four digits after the decimal point (in percentage).
Attachment:- International Business Finance.rar